GDP first quarterly estimate, UK: April to June 2019

• UK gross domestic product (GDP) in volume terms was estimated to have fallen by 0.2% in Quarter 2 (Apr to June) 2019, having grown by 0.5% in the first quarter of the year.

• When compared with the same quarter a year ago, UK GDP increased by 1.2% in Quarter 2 2019; a slowing from 1.8% in Quarter 1 (Jan to Mar) 2019.

• Services sector output provided the only positive contribution to GDP growth, although growth in this sector slowed to 0.1% in Quarter 2 2019.

• The production sector contracted by 1.4% in Quarter 2 2019, providing the largest downward contribution to GDP growth; the fall was driven by a sharp decline in manufacturing output, reflective of increased volatility in the first half of 2019.

• Nominal GDP increased by 0.4% in Quarter 2 2019, down from 0.9% in Quarter 1 2019.

Gross domestic product (GDP) growth is the main indicator of economic performance. There are three approaches used to measure GDP; the output approach, the expenditure approach and the income approach. Further information on all three approaches to measuring GDP can be found in the short guide to national accounts (PDF, 317KB).

Data in chained volume measures within this bulletin have had the effect of price changes removed (in other words, the data are deflated), with the exception of income data, which are only available in current prices.

International Financial Reporting Standards (IFRS16)

In January 2019, a new reporting standard took effect for those businesses using the International Financial Reporting Standards (IFRS) accountancy framework. IFRS16 Leases brings the reporting of operating leases onto balance sheets. This has impacted how some businesses have reported on their fixed assets, mainly through our Quarterly Acquisition and Disposal of Capital Assets Survey (QCAS), used in the compilation of gross fixed capital formation (GFCF) and business investment.

While we recognise there is a change to the accounting standards for some businesses, there has been no change to national accounts standards on the treatment of leases. To assess the impact of IFRS16’s introduction on GFCF and business investment estimates, we have contacted around 360 QCAS respondents with large movements in their data to ask them which accountancy framework they used and what, if any, impact IFRS16 had on their data for both Quarter 1 2019 and Quarter 2 2019 and if they use the IFRS framework.

As a result, we have made an adjustment of approximately £240 million to remove the quantified impact of its introduction in Quarter 1 2019 and an adjustment of £132 million in Quarter 2 2019 to better reflect underlying growth for GFCF and business investment. The asset most affected by the introduction of IFRS16 in Quarter 1 2019 was information and communication technology (ICT) equipment and other machinery and equipment. In our provisional Quarter 2 2019 estimates, intellectual property products were the asset most affected. We will continue to monitor the impact of IFRS 16’s introduction in the future.

Quarterly Stocks Inquiry expansion for Quarter 2 and Quarter 3 2019

To address users’ concerns about the sample size of the Quarterly Stocks Inquiry and the potential impact on quality, we have temporarily improved the sample size from 5,500 to 9,500 businesses. We will assess at the end of that period the impact on it’s quality. The increased sample size will also help us better understand the impact of businesses’ preparations in relation to stockpiling ahead of the UK’s planned exit from the European Union on 31 October.

The inquiry is used in the compilation of the changes in inventories component within gross capital formation. Our early analyses have shown that the introduction of this increased sample has not caused any significant discontinuity in estimates of changes in inventories.

UK gross domestic product (GDP) contracted by 0.2% in Quarter 2 (Apr to June) 2019, having grown by 0.5% in the first quarter of the year. This is weaker than market expectations and the latest Bank of England forecast, which were for a flat Quarter 2.

The path of GDP and some of its components has been particularly volatile through the year so far, largely reflecting changes in timing of activity related to the UK’s original planned exit date from the European Union in late-March.

There is evidence that stockpiling was taking place in the first quarter of the year, which provided a boost to GDP, with the latest figures showing that these increased stock levels were partly run down in Quarter 2 2019. Furthermore, it was also reported that a number of car manufacturers had brought forward their annual shutdowns to April as part of contingency planning. Monthly estimates published today show that GDP growth was flat in June 2019, while there were some downward revisions to earlier months in the quarter.

The UK economy grew by 1.2% compared with the same quarter in the previous year (Figure 1), a slowing from 1.8% in Quarter 1 (Jan to Mar) 2019.

Looking beyond the volatility in the quarterly path, it appears that there has been some slowing in the underlying figures this year, with the six-month on six-month growth rate slowing from 1.0% in the second half of 2018, to 0.5% in the first half of 2019 (Figure 2). In line with the National Accounts Revisions Policy, no previous quarters are open for revision as part of this publication.

Nominal GDP increased by 0.4% in Quarter 2 2019, easing from the 0.9% recorded in the previous quarter. The implied GDP deflator represents the broadest measure of inflation in the domestic economy, reflecting changes in the price of all goods and services that comprise GDP. This includes the price movements in private and government consumption, investment and the relative price of exports and imports.

In the year to Quarter 2 2019, the implied GDP deflator increased by 1.9%, a strengthening from the previous quarter. Increases in the implied deflator are in part due to increases in fuel prices – particularly crude oil prices – which are in line with quarterly movements in CPI.

The output measure of gross domestic product (GDP) fell by 0.2% in Quarter 2 (Apr to June) 2019, at a time of increased volatility relating to the UK’s original planned exit date from the European Union (Figure 3).

Production output fell by 1.4% in the latest quarter – the largest decline since Quarter 4 (Oct to Dec) 2012 – driven by a 2.3% fall in manufacturing output. This is likely to have reflected the effects of bringing forward activity in the first quarter of the year and the decline in car production as summer shutdowns for planned maintenance were brought forward to April.

Services output growth slowed to 0.1% in the second quarter of 2019; this was the weakest quarterly figure in three years. Following growth of 1.4% in the first quarter of 2019, construction output fell by 1.3% in the second quarter of the year.

The volatility through 2019 has been pronounced in the production industry, particularly in the manufacturing sector. Following an increase of 1.1% in the previous quarter, production output fell by 1.4% in Quarter 2 2019 (Figure 4).

Manufacturing had been fairly subdued through 2018 but picked up sharply in the first quarter of 2019; this is consistent with activity being brought forward ahead of the UK’s original intended EU departure date. The second quarter of 2019 saw a reversal of this with manufacturing output falling by 2.3%. This was the largest quarterly fall since Quarter 1 2009. Figure 5 shows movements in the manufacturing sub-sections between Quarter 1 and Quarter 2 2019.

The fall in manufacturing was reflected in the recent Markit UK Manufacturing PMI (PDF, 148KB) for June 2019, which reported that it contracted at the fastest pace since October 2012. The fall of Manufacturing PMI in June 2019 was the third consecutive month of decline, attributed to a combination of factors including high stock levels and ongoing Brexit uncertainty.

The fall in manufacturing output in Quarter 2 2019 was also driven by a 5.2% decline in manufacturing output of transport equipment, which largely reflected the partial closures of various car manufacturing plants.

The fall in transport equipment in Quarter 2 is also echoed in the recent Society of Motor Manufacturers and Traders survey, which reported that UK car production fell by 20% in the first six months of the year. The fall in car production was attributed mainly to “falling demand in key markets, including the UK, exacerbated by factory shutdowns pulled forward in anticipation of the March Brexit deadline”. In addition, the recent CBI Industrial Trends Survey also recorded a fall in manufacturing output in the three months to June 2019. This was driven by the largest contraction in motor vehicle production since March 2009, due to the “bringing forward of planned seasonal plant closures to align with previous Brexit deadlines”.

There were also declines in the manufacturing output of pharmaceutical, chemical and metal products in Quarter 2 2019 (Figure 5). Following the boost to growth in most manufacturing industries in Quarter 1 2019, there were widespread falls in the second quarter, with electrical equipment being the only industry to experience notable growth.

Mining and quarrying output fell by 0.4% in the second quarter of 2019, driven by scheduled maintenance in a number of oil and gas fields. In contrast, electricity, gas, steam and air conditioning as well as water supply and sewerage production grew by 2.5% and 1.0% respectively in the second quarter.

Figure 6 shows that there has been a loss of momentum in the services industry over the last year. Services output increased by 0.1% in Quarter 2 2019, following an increase of 0.4% in the first quarter of the year, its weakest rate since Quarter 2 2016. This is in line with the UK Services Purchasing Manager’s Index (PMI) (PDF, 183KB) for June 2019, which reported that the services industry was close to stagnation. The recent slowdown in growth in the services PMI was linked to the “sluggish domestic economic conditions and greater risk aversion among clients in response to ongoing Brexit uncertainty”.

The easing in the services sector has also been reflected in the recent CBI Service Sector Survey, which noted how “underlying activity and confidence is clearly subdued”. There have also been some revisions to the monthly path of services sector growth, implying slightly weaker activity in April and May than previously estimated.

There has also been an easing in wholesale, retail and motor trades, which slowed to 0.2% in the second quarter of 2019, following an increase of 1.2% in the first quarter, with all three sectors weakening compared with the first three months of the year. The decline in wholesale stemmed from widespread falls across the industry, while the latest official figures show that retail sales growth eased to 0.7% in Quarter 2 2019.

Non-official indicators for retail sales include the Bank of England’s Agents’ Summary Survey, where the value of retail sales remained subdued in the second quarter, although there was a slight pick-up in consumer services due to the mild weather and late timing of Easter. Compared with the previous year, the British Retail Consortium reported that retail sales fell by 1.6% in June 2019, though it should be noted that these figures are not directly comparable with official retail sales figures due to important methodological factors.

Other services provided the only negative contribution to growth, subtracting 0.07 percentage points from services sector growth in Quarter 2 2019.This was due to widespread falls across the sector following growth in Quarter 1, particularly in accommodation and food services.

Financial and insurance activities output fell 0.2% in Quarter 2 2019, continuing the decline seen since Quarter 1 2017, although users should note early estimates are reliant on a higher level of forecast content. This weakness is reflected in the Bank of England’s Agents’ Summary Survey, which attributes the weaker demand for professional services – which includes financial services – to the recent political uncertainty.

Transport, storage and communications output increased by 1.0% in Quarter 2 2019, in line with the previous quarter due partially to the continued strength in the computer programming sector.

Construction output fell by 1.3% in Quarter 2 2019, following an increase of 1.4% in Quarter 1, in part reflecting a downward revision to the figure in May 2019. The quarterly fall was due primarily to a 6.0% decline in repair and maintenance work. However, public housing new work made a positive contribution, reflected in the latest Bank of England’s Agents’ Summary Survey that reported that “growth in social and affordable housing remained stronger” despite weaker housing market activity.

In terms of monthly movements, construction output fell in both April and June 2019 by 0.5% and 0.7% respectively, with a small increase of 0.3% in May. The June Construction Purchasing Managers’ Index (PDF, 174KB) marked the sharpest fall in overall construction output since April 2009. These PMI figures represent the sharpest drop in housebuilding for three years, driven by weaker demand conditions and concerns about the outlook for residential sales. The recent fall in the construction PMI was linked to “Brexit uncertainty and subsequent delays to project starts”.

The expenditure approach to measuring gross domestic product (GDP) contracted by 0.2% in Quarter 2 (Apr to June) 2019.

Trade imports and exports have been volatile this year, in part reflecting the effects of movements of unspecified goods – which include non-monetary gold – in the first two quarters of the year. There has also been a reversal in the contribution of gross capital formation (GCF) in Quarter 2, reflecting to a large extent the pronounced building up of stocks in the run-up to the UK’s original exit date from the European Union at the end of March. This decline in the contribution from GCF also reflects movements in valuables offsetting changes in trade of unspecified goods (described in more detail later).

Private consumption – which consists of both household expenditure and non-profit institutions serving households (NPISH) expenditure – and government consumption continued to contribute positively to GDP growth in Quarter 2 2019 (Figure 7).

There have been some notable movements in imports of unspecified goods, which includes non-monetary gold (NMG), in the second quarter of 2019, broadly representing a reversal in activity from the first quarter (Jan to Mar). These unspecified goods have large and offsetting impacts to gross capital formation and net trade. These movements do not affect headline GDP as they are recorded as equivalent offsetting impacts in the UK National Accounts, but they are reflected in the composition of GDP growth. More information on how non-monetary gold features in GDP is available.

In contrast to Quarter 1 2019, there has been a sizeable fall in the import of unspecified goods in Quarter 2, along with a fall-back from the record high in the acquisition less disposal of valuables seen in the first quarter of 2019.

The UK trade deficit narrowed to 0.8% of nominal GDP in Quarter 2 2019, following a significant widening in Quarter 1 where it reached 3.7% – its widest level in 44 years. That said, these figures were explained in part by large flows of unspecified goods in the first three months of the year. The narrowing of the trade deficit in Quarter 2 reflects a notable decline in imports, including unspecified goods.

To help understand the underlying movements in UK trade Figure 8 and Figure 9 show trade imports and exports excluding unspecified goods. The movements in trade flows through the year are consistent with activity being brought forward ahead of the UK’s original intended exit date from the European Union in March 2019.

In addition to the movements in unspecified goods, there have also been falls in the value of imports in a number of other products in real terms (Figure 8). The volume of chemical imports fell £4.6 billion in Quarter 2 2019, reflecting primarily a decrease in medicinal and pharmaceutical products from the EU. The volume of machinery and transport equipment imports also fell, decreasing by £4 billion in Quarter 2. This is in part due to a decrease in imported goods from the EU, including cars.

The 3.3% fall in exports in Quarter 2 2019 reflected falls in the volume of exports in products including machinery and transport equipment, and chemicals (Figure 9). This is consistent with a range of external evidence, including the recent British Chamber of Commerce Quarterly Economic Survey, which recorded how the number of firms reporting an increase in export sales fell to a three-year low. More detail on the movements in trade data can be found in the UK trade: June 2019 release.

GCF – which includes gross fixed capital formation (GFCF), changes in inventories and acquisitions less disposal of valuables – made a negative contribution of 4.01 percentage points to overall GDP growth in Quarter 2 2019. This decline broadly represents a fall-back from Quarter 1 2019 (Figure 10), where GCF was boosted by the build-up of stocks held by some businesses ahead of the UK’s original exit date from the European Union at the end of March 2019, alongside notable movements in unspecified goods.

In Quarter 2 2019, changes in inventories (excluding both balancing and alignment adjustments) subtracted 2.24 percentage points from GDP growth. The fall-back in changes in inventories in Quarter 2 follows five consecutive quarters of positive contributions to growth.

Alignment adjustments and balancing adjustments are typically applied to the inventories component to help balance the different approaches to GDP – more detail on these can be found in the Quality and methodology section of this bulletin. When these adjustments are removed, the underlying data show a substantial decrease of approximately £4.9 billion in stocks being held by UK companies in the most recent quarter (Table 2). Falls in stock levels are seen across all manufacturing industries with the exception of materials and fuels, and mining and quarrying. Data for previous periods are available.

GFCF decreased by 1.0% in the second quarter of 2019, following an increase of 1.2% in the first quarter that reflected an increase in both business and government investment. The decline in the latest quarter mainly reflects a 2.7% fall in government investment. This was driven by widespread falls, although users should note that both government consumption and investment figures are based on the latest available budgetary information, provided by government departments including HM Treasury and local government. These estimates may be subject to revision when outturn data are available.

Previous analysis has highlighted how business investment has been subdued compared with comparative points in previous cycles, as external evidence has pointed to the effects of heightened economic uncertainty. Business investment fell 0.5% in Quarter 2 2019, following an increase in the first quarter of the year, which followed four consecutive quarters of decline throughout 2018.

The fall in the latest quarter was driven by declines in investment in buildings and to a lesser extent information and communication technology (ICT) equipment and other machinery and equipment. The fall in business investment in Quarter 2 2019 is consistent with a variety of external evidence, including the recent Deloitte CFO Survey, which recorded continued corporate caution due to high-risk aversion amongst businesses centred around the recent political uncertainty.

In addition, the Bank of England’s Agents’ Summary for Quarter 2 2019 recorded the lowest score for investment intentions since January 2010, with the majority of contacts reporting that “they did not view the extension of the EU withdrawal period as an opportunity to unlock investment”.

These figures should be interpreted with some caution as early estimates of business investment can be prone to revision. Furthermore, it should be noted that these estimates are subject to higher levels of uncertainty in this release, reflecting the introduction of International Financial Reporting Standard (IFRS) 16 Leases in January 2019 – further information can be found in the Things you need to know about this release section.

Following average growth of 0.5% through 2017 and 2018, household consumption has been slightly stronger in the first half of this year. Household consumption increased by 0.5% in the second quarter of 2019, a slight easing from the 0.6% increase in the first quarter. External evidence suggests that consumer spending remains relatively subdued, with the GfK Consumer Confidence index falling back in June 2019, which was attributed to consumers’ continued concern over the wider economy coupled with falls in personal finance.

Government consumption increased by 0.7% in Quarter 2 2019, driven by increases in government spending in a number of sectors, including healthcare and spending by local authorities.

Growth in nominal gross domestic product (GDP) slowed to 0.4% in Quarter 2 (Apr to June) 2019, following an increase of 0.9% in the first three months of the year.

This was driven by a 1.3% increase in compensation of employees (CoE), partially offset by a 3.2% fall in gross operating surplus (GOS) of corporations (Figure 11). Alignment adjustments and balancing adjustments are typically applied to the GOS component to help balance the different approaches to GDP – more detail on these can be found in the Quality and methodology section of this publication.

Compensation of employees (CoE) increased by 1.3% in Quarter 2 2019, with wages and salaries – the largest component of CoE – increasing by 0.9% from the previous quarter. When compared with the same quarter a year ago, we have seen a stronger growth in both private and public sector salaries, which has led to this increase.

Release content

All data in this bulletin are seasonally adjusted estimates. Non-seasonally adjusted data are available within the UK Economic Accounts (UKEA). These data can be downloaded directly from the UKEA dataset and on the UKEA main aggregates dataset table. Data published in the UKEA reflect data as published on 28 June 2019 and are consistent with the data in this release.

A number of other economic indicators were published on 9 August 2019, these include:

• GDP monthly estimate, UK: June 2019 release
• data for GFCF by sector and asset, revision triangles and a real time database
• Index of Services release
• Index of Production release
• Construction output in Great Britain release
• UK trade release

Blue Book 2019

Each year we produce an annual update to the UK National Accounts in the Blue Book and Pink Book and the associated releases. As already announced, the Blue Book and Pink Book 2019 consistent datasets will be published on 30 September 2019. Details have already been provided on the scope in the article Latest developments and changes to be implemented in Blue Book and Pink Book 2019 and indicative impacts on headline gross domestic product components for the years 1997 to 2016 were published on 27 June 2019 in the article Blue Book 2019 indicative impacts on GDP current price and chained volume measure estimates: 1997 to 2016.

This year, due to the very demanding set of changes being put through in the annual update we are exceptionally not going to fully reconcile 2017 annual data, instead producing an indicative balance to allow further time for final quality assurance of the data. As a consequence, the reference year and last base year for all chained volume measure series will remain as 2016. Further articles are planned ahead of the 30 September 2019 releases as detailed in Table 3.

Gross value added (GVA) at factor cost

Within the UK Economic Accounts (UKEA) we publish four series presenting GVA at factor cost (identifiers KGN7, KGN6, KGN5 and YBHH). In the March Quarterly national accounts release we announced that we are considering withdrawing these series from publication. This is because GVA at factor cost is not recognised with the UN System of National Accounts 2008 (SNA08) framework, therefore we have concerns over the methodology used to calculate these estimates.

We have received a small amount of user feedback and we welcome further user feedback around our proposal to remove these series from the UKEA publication from September 2019.

Regional gross domestic product (GDP)

On 18 June 2019, we announced our plans to publish quarterly estimates of GDP for each of the regions of England and for Wales.

The Gross domestic product (GDP) Quality and Methodology Information report contains important information on:

• the strengths and limitations of the data and how it compares with related data
• uses and users of the data
• how the output was created
• the quality of the output including the accuracy of the data

The national accounts are drawn together using data from many different sources. This ensures that the national accounts are comprehensive and provide different perspectives on the economy, for example, sales by retailers and purchases by households.

Important quality issues

There are common pitfalls in interpreting data series and these include:

• expectations of accuracy and reliability in early estimates are often too high
• revisions are an inevitable consequence of the trade-off between timeliness and accuracy
• early estimates are based on incomplete data

Very few statistical revisions arise as a result of “errors” in the popular sense of the word. All estimates, by definition, are subject to statistical “error”.

Many different approaches can be used to summarise revisions; the “Accuracy and reliability” section in the Quality and Methodology Information report analyses the mean average revision and the mean absolute revision for GDP estimates over data publication iterations.

Reaching the GDP balance

The different data content and quality of the three approaches – the output approach, the expenditure approach and the income approach – dictates the approach taken in balancing quarterly data. In the UK, there are more data available on output in the short-term than in either of the other two approaches. However, to obtain the best estimate of GDP (the published figure), the estimates from all three approaches are balanced to produce an average, except in the latest two quarters where the output data takes the lead due to its larger data content.

Information on the methods we use for Balancing the output, income and expenditure approaches to measuring GDP is available.

Alignment adjustments, found in Table M of the GDP first quarterly estimate data tables in this release, have a target limit of plus or minus £2,000 million on any quarter. In periods where the data sources are particularly difficult to balance, larger alignment adjustments are sometimes needed. This has not been the case in Quarter 2 (Apr to June) 2019. To achieve a balanced GDP dataset through alignment, balancing adjustments are applied to the components of GDP where required. They are applied to the individual components where data content is particularly weak in a given quarter due to a higher level of forecast content. The balancing adjustments applied in this quarter are shown in Table 4, the resulting series should be considered accordingly.