UK GDP: tax worries weigh on activity

Tax worries dampen growth: The slight decline in economic activity in October confirms that growth suffered in the run-up to the budget, perhaps as worries about higher taxation caused households and firms to postpone spending decisions. GDP fell by 0.1% mom for the second month in a row, disappointing the Bloomberg consensus forecast of a 0.1% mom gain in October. An immediate bounce back is unlikely. The purchasing managers’ index (PMI) fell in November, suggesting that GDP could stagnate in Q4 after the 0.1% qoq increase in Q3, which would be below our +0.2% qoq forecast.

Broad-based slowdown: While the industrial sector is struggling the most, the slowdown in growth compared to the first half of the year was broad based – see Chart 1. Comparing the latest three months to the previous three, to smooth out the volatility in the monthly data, the decline in industrial output sped up from -0.2% 3mo3m to -0.3% 3mo3m in October. Growth in services output remained soft too, holding steady at +0.1% 3mo3m, while construction activity slipped back from +0.8% 3mo3m to +0.4% 3mo3m. Note that much of the weakness in the latter can be put down to a fall in repair and maintenance spending (i.e. home improvement), perhaps as those with cash on hand feared a budget-related tax bill.

International headwind: The new trade data covering October confirm that the external sector has been a major drag on GDP growth this year, as a strengthening pound (up 5% year-to-date against the euro) and sub-1% yoy GDP growth in the Eurozone have caused imports to rise while exports have stagnated – see Chart 2. Domestic demand is performing better, which is why despite the widening in the trade deficit subtracting 1.7ppt from annual GDP growth in Q3, the economy still expanded by 1.0% yoy. As we move past the adjustment in trade to a stronger pound, and because we suspect global growth will strengthen somewhat next year, net trade is unlikely to be as large a drag in 2025. That should allow improving domestic demand to shine through. Significant tariffs on exports to the US are a risk, but the UK’s large trade surplus in services is unlikely to come under fire.

A better 2025: The weak end to 2024 does not undermine our view that activity will pick up next year. A rise in government consumption is almost guaranteed. Meanwhile, surveys of households and businesses show reasonably robust confidence. Notably, the slight further rise in GfK consumer confidence in December was accompanied by a decline in savings intentions, supporting our view that consumers are starting to become less cautious. And as we set out in our 12 December note, “UK: investment rebound intact”, business investment should remain on an upward trend.

BoE to take a December pause: Although the economy looks set to record little growth in the second half of 2024, we doubt the Bank of England will cut bank rate again at its next meeting on 18 December.Labour cost pressures, both from still-elevated pay growth and the increase in employer payroll taxes announced in the budget, are likely to mean that disinflation in services prices remains slow. Instead, the next rate reduction will come in February, in our view.

Andrew Wishart

Senior UK Economist

+44 20 3753 3017

andrew.wishart@berenberg.com

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