Investment Institute
Market Alerts

UK reaction: Momentum easing

KEY POINTS
GDP held steady on the month in July, below the consensus for a rise of 0.2%
A further rise in services (0.1% mom), was offset by declines in production (-0.8% mom) and construction activity (-0.4% mom)
Activity still was up 0.5% on a three-month-on-three-month basis, but looks set to ease further over the quarter. We look for a 0.3% quarterly rise in Q3
We remain comfortable with our forecast for growth of 1.2% this year
The latest data will provide further tentative evidence that the Bank of England were right to look through the strength in activity in H1, and increase scope for a further cut this year. We continue to look for a 25bp cut in November, leaving Bank Rate at 4.75% by year-end

The latest growth figures suggest momentum is now starting to ease after a strong H1. Indeed, monthly activity showed that growth remained unchanged on the month in July – markets had expected a 0.2% month-on-month rise – after an equivalent reading in June. On a three-month-on-three-month basis, growth slowed to 0.5% in July, from 0.6% in Q2, and looks set to continue easing across the third quarter. Note quarterly growth will slow to around 0.3% in Q3, even if monthly activity increases by 0.2% in August and September, in line with our forecast, barring any revisions.

Looking at the breakdown, services activity continued to boost overall growth, rising by 0.1% on the month and 0.6% on a three-month basis. Within that so-called “white collar” services, such as IT & comms and admin services continued to rebound healthily, contributing 0.06 percentage points and 0.03ppt, respectively. And momentum increased in the distributive trade sectors, following a mixed summer, in part due to the weather. The latest data also showed some signs that households are feeling more confident in parting with their money, though they remain cautious. Indeed, consumer-facing services rose by 0.3% on the month in July, following a 0.7% decline in June, leaving activity in these areas up 0.1% on a three-month basis. We think consumption will continue to tick up, albeit slowly, over the remainder of the year, as falling interest rates boost confidence and bring down mortgage rates.

Activity in the production sectors, by contrast, declined. Indeed, industrial production fell 0.8% in July, wiping out all of June’s 0.8% rise, leaving growth down 0.1% on a three-month basis. The weakness in July was broad-based, with three of the four main sectors declining, though the largest contribution came from a 1% decline in manufacturing output. Admittedly, the drop in manufacturing activity in July did appear to be somewhat concentrated in volatile categories such as transport equipment, which can jump around due to its high-value nature. But the global backdrop is weak, pointing to a sluggish recovery at best, despite the recent strength in the S&P Global manufacturing PMI. Construction output, meanwhile, dropped by 0.4% in July, reflecting declines in both new work and repair & maintenance. That followed a solid 0.5% increase in June, however, so growth was still up 1.2% on a three-month basis. And falling borrowing costs, coupled with government initiatives should support the sector going forward.

Taking a step back, today’s data support our view that the pace of the recovery will ease in the second half of the year, now that much of the payback growth from H2 2023 and supply-side improvements has been worn out. We look for quarterly increases of around 0.3% in Q3 and Q4, in line with the message from the S&P Global composite PMI and the Lloyds’ Business Barometer, leaving GDP up 1.2% this year. For the Bank of England, easing momentum will add to the conviction that MPC was right to largely look through the strength in H1 and will add weight to the argument for further cuts going forward. We look for one further 25bp cut to Bank Rate in November, leaving the baseline interest rate at 4.75% by year-end.   

ECB update: Cautiously surfing the dovish wave
Macroeconomics Market Alerts

ECB update: Cautiously surfing the dovish wave

Investment Institute
Best Laid Plans Go Awry
Macroeconomics

Best Laid Plans Go Awry

Investment Institute

Have our latest insights delivered straight to your inbox

SUBSCRIBE NOW
Subscribe to updates.

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ

    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    Back to top