GDP first quarterly estimate, UK: July to September 2018

• UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.6% between Quarter 2 (Apr to June) 2018 and Quarter 3 (July to Sept) 2018.

• All four sectors of output contributed positively to growth in Quarter 3 2018, with the largest contribution from the services industries at 0.3 percentage points.

• Household spending grew by 0.5% while business investment fell by 1.2% between Quarter 2 and Quarter 3 2018.

• Net trade contributed 0.8 percentage points to GDP growth in Quarter 3 2018, with a 2.7% rise in exports and flat growth in imports.

• Nominal GDP increased by 1.1%, driven by growth in compensation of employees of 1.3% in Quarter 3 2018.

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.

Today’s first estimate of quarterly GDP is published under the new publication model, which has been in effect from July 2018. By pushing back the publication of the first estimate of quarterly GDP by two weeks, we expect that this will lead to improvements in the accuracy and reliability of this initial estimate. It has also allowed for a timelier publication of the expenditure and income measures of GDP. Newly-published estimates of the monthly path of GDP are also available.

UK gross domestic product (GDP) is estimated to have increased by 0.6% in Quarter 3 (July to Sept) 2018, in line with latest market expectations, including the Bank of England’s (BoE) November 2018 Inflation Report (PDF, 5 MB) and the National Institute of Economic and Social Research’s (NIESR) GDP tracker.

Following a temporary slowdown in the first quarter of the year, GDP increased by 0.4% in Quarter 2 (Apr to June). In comparison with the same quarter in the previous year, the UK economy has grown by 1.5% (Figure 1), continuing its relatively subdued performance over the last year. In line with the National Accounts Revisions Policy, no previous quarters are open for revision as part of this publication.

Real GDP growth in Quarter 3 was driven by growth of 0.3% in July 2018, which stemmed from strong retail sales boosted by warm weather and the World Cup, as well as a low base reflecting the weaker start to the year. Month-on-month growth in real GDP has been flat in both August and September 2018, as shown in Figure 2. More information on the monthly path of GDP can be found in the GDP monthly estimate, UK: September 2018 release.

The implied GDP deflator represents the broadest measure of inflation in the domestic economy; it reflects changes in the price of all goods and services that comprise GDP, including the price movements in private and government consumption, investment and the relative price of exports and imports. In the year to Quarter 3 2018, the GDP deflator increased by 2.0%, the same rate seen in the year to Quarter 2. This reflected price growth in most expenditure components.

Growth in the government consumption deflator picked up to 3.4%, the strongest quarter-on-year growth rate since Quarter 3 2009. This was driven by increases to nominal estimates of central government expenditure, particularly on education and health. Volume sources used to inform real estimates remained largely flat leading to an increase in the deflator.

Growth in the output measure of gross domestic product (GDP) strengthened to 0.6% in Quarter 3 (July to Sept) 2018. Construction output growth continued to pick up following a weak start to the year, while quarterly output in the manufacturing sector rose for the first time in 2018. Growth in services output slowed to 0.4%, but remained the largest positive contributor to GDP growth in Quarter 3.

In the construction industry, output continued to recover following a weak start to 2018, which was in part impacted by the adverse weather. Output increased by 2.1% in Quarter 3 2018 – the fastest increase since Quarter 1 (Jan to Mar) 2017. The quarter-on-quarter growth was driven by a 1.7% increase in construction output in September, helped by a 2.8% increase in all new work that more than offset the month-on-month fall of 0.3% in repair and maintenance work. The increase in new work in September 2018 stemmed from notable increases in infrastructure and total new housing work, which contributed 0.90 and 0.85 percentage points to overall construction growth in September 2018 respectively. The pickup in Quarter 3 also reflected base effects in April 2018, where output growth was flat (Figure 3).

Output in the production sector rose by 0.8% in Quarter 3 2018, following a decline of 0.8% in Quarter 2 (Apr to June). While output increased across all four main production sectors, around half of total production growth in Quarter 3 was driven by manufacturing. Following two consecutive quarters of decline in the first half of 2018, manufacturing recovered in Quarter 3 to rise by 0.6%. While this pickup is somewhat at odds with the latest evidence from the Bank of England’s Agents’ summary survey – which saw both domestic and export manufacturing output ease in Quarter 3 – it is more in line with the September reading for the Markit Manufacturing Purchasing Manager’s Index (PMI), which saw an acceleration in output growth to a four-month high.

The recovery in manufacturing reflects a pickup across a number of industries following a weak Quarter 2 (Figure 2), although it was predominantly driven by transport equipment and specifically motor vehicle production. Transport equipment rose by 2.3% in Quarter 3, reflecting both a bounce back from a 2.7% fall in the previous quarter and strength in UK car exports in Quarter 3. This is consistent with the latest trade figures released today, which show a 5.8% increase in the export of machinery and transport equipment in Quarter 3, particularly to non-EU countries.

Despite the pickup in the production of transport equipment in the latest quarter, the underlying longer-term trend is one of decline (Figure 5). Compared with the same quarter a year ago, production of transport equipment fell by 0.2% in Quarter 3 2018, marking its first such decline since the global financial crisis. This longer-term weakness in car production in part reflects softer growth in domestic demand, at a time when household real incomes have been squeezed. The weakness in car production is broadly consistent with the latest data from the Society of Motor Manufacturers and Traders (SMMT), which noted a 16.8% fall in UK car manufacturing in September 2018 compared with the same period in 2017. The SMMT attributed the slowdown to a “turbulent first three quarters as global trade tensions, model changes and uncertainty over diesel and Brexit were exacerbated by testing backlogs due to new emissions regulations”.

Meanwhile, output in the energy supply sector rose by 1.9% in Quarter 3. Energy supply production had been heavily affected by weather conditions in the first half of 2018, with production boosted by the cold weather in Quarter 1, followed by some element of bounce back and unusually warm temperatures in Quarter 2. The Quarter 3 outturn sees production in energy supply return to levels broadly in line with those seen at the end of 2017. In other sectors, mining and quarrying output rose for the third consecutive quarter (1.7%) and output in the water and waste management sector rose by 0.3%.

In the services industries, output growth eased to 0.4% in Quarter 3 2018, contributing 0.3 percentage points to growth in GDP. This is in line with average rates seen since the start of 2017, following the relatively strong growth of 0.6% in Quarter 2 2018, which largely reflected a pickup in retail trade, driven by buoyant food and drink sales as consumers took advantage of the warmer weather and the World Cup. The strength in retail trade in Quarter 2 also partly reflected a pickup from the weak start to the year, which was adversely affected by poor weather conditions as consumers stayed indoors and avoided the high street.

Following solid growth of 2.0% in Quarter 2 2018, growth in retail trade slowed to 1.1% in Quarter 3. While this drove the slowdown in total services growth, the sector still made a positive contribution in Quarter 3 (Figure 6). The overall contribution from the wholesale, retail and motor trades sector was weighed down by weakness in motor trades, which fell by 1.9% in Quarter 3. This marked the weakest quarterly growth rate in motor trade services since Quarter 4 (Oct to Dec) 2012 and continues a declining trend seen since the start of 2016. The slowdown in motor trade services – which measures domestic consumption – appears notably more pronounced than the slowdown in production of transport equipment, suggesting that global demand for UK car exports has helped support production.

In Quarter 3, the largest growth contribution came from the transport, storage and communications sector (0.2 percentage points). Computer programming continues to perform particularly well, with growth strengthening to 2.2% in Quarter 3. Despite growth remaining elevated, there are signs that the recent strength is easing. Compared with the same quarter a year ago, growth slowed for the fifth consecutive quarter (4.4%), following a period of double digit growth throughout most of 2016 and 2017.

The expenditure measure of gross domestic product (GDP) increased by 0.6% in Quarter 3 (July to Sept) 2018. Private consumption, government consumption and net trade all contributed positively to growth, while gross capital formation (GCF) subtracted from growth (Figure 7).

Growth in household consumption increased slightly to 0.5% in Quarter 3 2018, above the average quarterly growth rate seen throughout 2017. While the increase in Quarter 3 reflected growth across most categories of expenditure, there was a notably sharp drop in household spending on transport – consistent with the weak figures seen in motor trades services as well as the latest Society of Motor Manufacturers and Traders (SMMT) data.

The largest negative contribution to growth in Quarter 3 came from gross capital formation (GCF) – which includes gross fixed capital formation (GFCF), changes in inventories and acquisitions less disposal of valuables – subtracting 0.6 percentage points. However, this largely reflects the application of an alignment adjustment (used to balance the three approaches to measuring GDP) to the changes in inventories component. More information on the alignment adjustment is available in the Quality and methodology section. GFCF contributed 0.1 percentage points to GDP growth in Quarter 3 2018. The 0.8% quarterly rise in GFCF was driven by a strong rise in government investment (8.6%), which was the strongest seen since Quarter 1 (Jan to Mar) 2014 and reflects broad expenditure growth across central government, most notable in defence.

The rises in government and private dwelling investment were partially offset by a 1.2% decrease in business investment in Quarter 3. This was the sharpest decline since Quarter 1 2016 and marked the third consecutive quarterly fall – which has not been seen since the global financial crisis (Figure 8). However, today’s figures should be interpreted with some caution as early estimates of business investment can be prone to revision. The recent subdued business investment environment is consistent with external surveys of investment intentions, which attribute much of the weakness to Brexit-related economic and political uncertainty. The uncertainty appears to be deepening recently, with the latest Bank of England’s (BoE) November Inflation Report noting that Brexit and associated uncertainty “may have weighed on investment by more than had been expected in August”. The BoE’s Agents’ summary survey for Quarter 3 further indicated that Brexit uncertainty was the single largest factor weighing on firms’ investment spending plans. These sentiments are echoed in the latest Confederation of British Industry’s (CBI) Industrial Trends Survey (ITS) for the three months to October, which saw planned capital expenditure on plant and machinery for the year ahead fall at its fastest pace since July 2009.

Net trade made the largest positive contribution to GDP growth in Quarter 3 2018 (0.8 percentage points), driven by a 2.7% rise in exports, while imports were flat. The rise in exports is broadly consistent with external survey indicators which have remained solid, despite easing in recent months following a sustained period of strong growth. The export growth in Quarter 3 reflects an increase in both goods (4.4%) and services exports (0.8%), with goods exports to non-EU countries growing more robustly than to the EU. On a commodity level, exports of fuels and transport equipment performed particularly well in Quarter 3, with the latter being consistent with the strength seen in today’s production figures on transport equipment.

Growth in nominal gross domestic product (GDP) strengthened for the second consecutive quarter in Quarter 3 (July to Sept) 2018, rising by 1.1%. This was driven by solid growth of 1.3% in compensation of employees (CoE), which contributed 0.6 percentage points to overall growth of nominal GDP – the largest contribution since Quarter 2 (Apr to June) 2017 (Figure 9). This is backed up by the latest labour market data, which show that nominal wage growth (excluding bonuses) increased at an average annual rate of 3.1% in the three months to August 2018; annual nominal wage growth has not been higher since the three months to December 2008. Gross operating surplus (GOS) of corporations increased by 1.4% in Quarter 3, while other income increased by 0.8%.

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 September 2018 and will be next updated on 21 December 2018 when the Quarter 3 (July to Sept) 2018 Quarterly national accounts release and UKEA will become consistent.

Monthly GDP

Estimates of rolling three-month GDP and monthly GDP for September are available in the GDP monthly estimate, UK: September release.

Business investment

Further details on GFCF and business investment along with data for GFCF by sector and asset, revision triangles and a real time database were published on 9 November 2018. Changes for this release reflect the new publication model for business investment announced in the notice accompanying the Business investment in the UK: January to March 2018 revised results.

Index of Services

The Index of Services publication was published on 9 November 2018 and includes data for September 2018.

Index of Production

The Index of Production release was published on 9 November 2018 and includes data for September 2018.

Construction output in Great Britain

The Construction output in Great Britain publication was published on 9 November 2018 and includes data for September 2018.

UK trade

The UK trade release was published on 9 November 2018 and includes data for September 2018.

International Passenger Survey

The International Passenger Survey (IPS) has recently transferred data collection from paper forms to tablet computers. While initial analysis of the new data found no detectible discontinuities, we are continuing to check the data. Therefore, headline trade and other national accounts estimates will continue to include some forecast data for exports and imports of travel services in the most recent periods. More information is available in the Overseas travel and tourism release.

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 “Validation and quality assurance” 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 – dictate 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 first quarterly estimate of GDP datasets in this release, have a target limit of plus or minus £2,000 million on any quarter. 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; in this quarter inventories has been subject to balancing adjustments and the resulting series should be considered accordingly.

The size and direction of the quarterly alignment adjustments in Quarter 3 (July to Sept) 2018 indicate that in this quarter the levels of expenditure and income are lower than the level of output. Table 1 shows the balancing adjustments applied to the GDP estimates in this publication.