UK economy returns to growth as car production picks up

The UK economy grew in May, reversing earlier declines, as previously stalled car production started to pick up, official figures showed on Wednesday.

The Office for National Statistics said UK GDP grew at a 0.3% month-on-month clip in May, an improvement on April’s 0.4% fall.

GDP in the three months to May was also ahead by 0.3%. Within that, the services sector grew by 0.3% on a rolling three-month basis for the second month in a row, but growth in the construction sector was flat.

Industrial production was ahead 1.4% in May, a partial recovery on April’s 2.9% slide, which was caused by car manufacturers putting the brakes on production over fears of a no-deal Brexit. Commenting on May's 1.4% growth, the ONS noted: “This was driven largely by a pick-up in the of transport equipment, following several car firms shutting down production around the originally intended departure date from the European Union.”

Total output rose by 0.3% in the three months to May, with nine of the 13 subsectors reporting rises. However, the overall three-month figure was held back by a hefty 4.6% fall in transport equipment.

Analysts had been looking for GDP to improve by around 0.3% in May. But despite the data meeting their forecasts, many remained downbeat.

David Cheetham, chief markets analyst at xtb, said: “Even though the data represents a decent recovery from the sizable drop in April, it will still take a near miracle for the UK economy to avoid falling into contraction territory in the second quarter, with an increase of 0.8% required in June alone needed to avoid this fate.

“Considering the soft PMI readings already seen for last month, this would represent a huge shock and, as such, it seems that the economy is set to post its first quarter decline in almost seven years."

Nick Kilbey, sales trader at Foenix Partners, said: “Albeit a slight improvement, this now requires the economy to grow by a staggering 0.8% in June to post flat growth in the second quarter. The likelihood is that Brexit has taken its toll on the economy, moving the UK into contraction for the first time since 2012.”

However, Samuel Tombs, chief UK economist at Pantheon Macroeconomics, took a more upbeat view. He argued that the economy was now on course to slow to zero in the second quarter, against +0.5% in the first.

“That would exceed the current consensus, of -0.1%, and match the Monetary Policy Committee’s forecast in June, when it reiterated its guidance that the next move in interest rates likely would be up.

“GDP growth, meanwhile, almost certainly will recover in the third quarter. The seasonally-adjusted measure of car production will surge in August, because plants already have completed this year’s maintenance. Industrial production also should recover from the second-quarter level, which has been depressed because manufacturers’ customers have run down their stockpiles of goods.

“The services sector, meanwhile, should benefit from brisk growth in consumer spending.”

Paul Dales, chief UK economist at Capital Economics, said: “There’s clearly a risk of recession, but we’re not expecting one. Much of the probable weakness in the second quarter is because the risk of a no-deal on 29 March meant that activity was shifted from the second quarter into the first, which resulted in the stronger 0.5% rise.

“Just as GDP data for the first quarter suggested the economy was stronger than it really was, the data for the second quarter will suggest it's weaker than it really is. As the truth is somewhere in between, GDP will probably rise in the third quarter.”

A recession is defined as two consecutive quarters of contraction.

Rob Kent-Smith, head of GDP at the ONS, said: “GDP grew moderately in the latest three months, with IT, communications and retail showing strength. Despite this, there has been a longer-term slowdown in the often-dominant services sector since summer 2018.

“The economy returned to growth in May following the fall seen in April. This was mainly due to the partial recovery in car production.”