GDP first quarterly estimate, UK: July to September 2019

• UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.3% in Quarter 3 (July to Sept) 2019.

• When compared with the same quarter a year ago, UK GDP increased by 1.0% in Quarter 3 2019; this is the slowest rate of quarter-on-year growth since Quarter 1 (Jan to Mar) 2010.

• The service and construction sectors provided positive contributions to GDP growth, while output in the production sector was flat in Quarter 3 2019.

• Private consumption, government consumption and net trade contributed positively to GDP growth, while gross capital formation (GCF) contributed negatively to growth in Quarter 3 2019.

• Nominal GDP increased by 0.5% in Quarter 3 2019, down from 0.7% in Quarter 2 (Apr to June) 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 A Short Guide to the UK 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). The exception to this is 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 (Jan to Mar) 2019 and Quarter 2 (Apr to June) 2019 and if they use the IFRS framework. As a result, we made a downward adjustment of approximately £244 million to remove the quantified impact of its introduction in Quarter 1 2019 and a downward adjustment of £133 million in Quarter 2 2019 to better reflect underlying growth for GFCF and business investment.

The assets most affected by the introduction of IFRS16 in Quarter 1 2019 were ICT equipment and “other machinery and equipment”. In our Quarter 2 2019 estimates, intellectual property products were the assets most affected. We have continued to monitor the impact of IFRS 16’s introduction for our Quarter 3 (July to Sept) 2019 provisional estimates and will do so going forward. As a result, a downward adjustment of £185 million has been applied to reflect IFRS16’s impact in the latest quarter, with intellectual property products and “other buildings and structures” being the assets most affected.

Quarterly Stocks Inquiry temporary expansion

To address users’ concerns about the sample size of the Quarterly Stocks Inquiry and the potential impact on quality, we temporarily increased the sample size from 5,500 to 9,500 businesses for Quarter 2 and Quarter 3 2019, ahead of the UK’s planned exit from the European Union on 31 October 2019. With EU exit now likely to be delayed until 31 January 2020, we have decided to extend this sample boost into Quarter 4 (Oct to Dec) 2019 and will assess whether to extend this further.

The inquiry is used in the compilation of the changes in inventories component within gross capital formation (GCF). 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) increased by 0.3% in Quarter 3 (July to Sept) 2019 following a decline of 0.2% in the previous quarter. There was a range of external expectations for growth in Quarter 3 2019, including the National Institute of Economic and Social Research forecasting growth of 0.5% and the Bank of England November 2019 inflation report predicting growth of 0.4% in Quarter 3 2019.

The underlying momentum in the UK economy shows some signs of slowing. Compared with Quarter 3 2018, the UK economy increased by 1.0%; this is the weakest figure since Quarter 1 (Jan to Mar) 2010 (Figure 1).

In line with the National Accounts Revisions Policy, no previous quarters are open for revision as part of this publication. However, there have been some revisions made to the monthly path of the output components of GDP. GDP monthly estimate, UK: September 2019 provides further information on both the monthly movements and revisions to GDP.

Growth in nominal GDP has continued to slow, increasing by 0.5% in Quarter 3 2019, easing from the 0.7% 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 make up GDP. This includes the price movements in private and government consumption, investment, and the relative price of exports and imports. It slowed notably in Quarter 3, increasing by 0.3%; this is an easing from the 1.0% recorded in the previous quarter. Compared with Quarter 3 2018, the implied GDP deflator increased by 2.0%. The easing in quarter-on-quarter and quarter-on-year growth in the implied GDP deflator has stemmed predominantly from a slowing in the gross capital formation (GCF) and household consumption implied deflators. Movements in the implied deflator are in line with quarterly movements in consumer price inflation, in which growth has also slowed in recent periods.

The output measure of gross domestic product (GDP) grew by 0.3% in Quarter 3 (July to Sept) 2019. This followed a period of increased volatility in the first half of the year relating to the UK’s original planned exit date from the European Union, likely reflecting the effects of bringing forward activity in the first quarter of the year and the decline in car production owing to partial car plant shutdowns in April. This has been most evident in the quarterly movements in manufacturing output in Quarter 2 (Apr to June) 2019, which saw a fall of 2.8%.

Manufacturing was flat in Quarter 3 2019, as was production. Services output increased by 0.4% in Quarter 3 2019, following the weakest quarterly figure in three years in the previous quarter. Construction output experienced a pickup following a weak Quarter 2, increasing by 0.6% (Figure 2).

The service sector remained relatively subdued with an increase of 1.4% in the year to Quarter 3; this is the weakest growth rate since the Quarter 4 (Oct to Dec) 2017. The easing has also been reported in the Quarter 3 2019 Bank of England Agents’ summary, which recorded how business services continued to grow at a modest rate, with weaker demand for transaction-related services partially offset by strong demand for IT services. The CBI Services Sector Survey also reported how business optimism across the service sector fell sharply in the three months to August, attributing the decline to political uncertainty, which was reported as holding back investment and expansion plans.

Following a loss of momentum in the second half of 2018 and the first half of 2019, services output increased by 0.4% in Quarter 3 2019. This has been driven by growth in all four of the service sector groupings shown in Figure 3, with the most notable contribution to growth coming from “other services” sectors, which is comprised of 11 service sectors. This increase stemmed from a 0.7% increase in human health and social work activities alongside a 0.7% increase in financial and insurance activities, which grew following five consecutive quarters of decline, although users should note early estimates are reliant on a higher level of forecast content. These increases more than offset declines in industries such as accommodation and food services in Quarter 3 2019.

There has also been continued strength in the information and communication industry, which contributed positively to growth for the sixth consecutive quarter, increasing by 0.8% in Quarter 3 2019. This has partially reflected an increase in UK-based film and TV production, which has performed particularly strongly in Quarter 3 2019. There was also a pickup in professional, scientific and technical activities following two quarters of decline, increasing by 0.7% in Quarter 3 2019.

Wholesale, retail and motor trades increased by 0.3% in Quarter 3 2019, following an increase of 0.1% in Quarter 2 2019. The increase in Quarter 3 was partially a result of growth in the retail sector, with the latest official retail sales figures showing that retail sales grew 0.6% in Quarter 3 2019. However, there appears to be a divergence between the official figures and the non-official indicators of retail sales, with a variety of external indicators signalling a recent decline in retail activity. These include the British Retail Consortium (BRC), which reported a 1.3% decline in year-on-year sales in September 2019, and the CBI, which reported a decline in retail sales volumes for the fifth consecutive month, citing the tough retail conditions and the recent sterling depreciation as key factors.

The volatility throughout the first half of 2019 has been particularly pronounced in the production industry. Following an increase of 1.1% in Quarter 1 (Jan to Mar) 2019, production output fell by 1.8% in Quarter 2 2019 (Figure 4). Production output was flat in Quarter 3. These trends reflected movements in the manufacturing industry, which experienced volatility in the first half of the year consistent with activity being brought forward ahead of the UK’s original intended European Union departure date, followed by a slowdown in activity in Quarter 2 exacerbated by partial car plant shutdowns in April. The subdued performance of the manufacturing sector in the three months to September – in which output was flat – has also been recorded by the recent CBI Industrial Trends Survey, which also noted that stock levels were above adequate, as uncertainty and the ongoing global manufacturing slowdown continued to have an adverse effect on manufacturers. The British Chambers of Commerce also reported a deterioration in manufacturing activity, reporting how the “manufacturing sector continues to toil under the weight of diminishing cashflow, weakening global demand and disrupted supply chains.”

Manufacturing failed to grow in Quarter 3 2019, with falls in many industries almost solely offset by an increase in the manufacturing output of transport equipment (Figure 5). This recovery in car production follows a decline in Quarter 2, because of partial closures of various car manufacturing plants.

Mining and quarrying output fell for the fourth consecutive quarter in Quarter 3 2019, decreasing by 1.7%. Following some volatility in the first half of 2019, electricity, gas, steam and air conditioning fell by 0.7% in Quarter 3. This was partially a result of higher than average temperatures in the UK in September. Water supply and sewerage production grew by 1.2% for the second consecutive quarter in Quarter 3 2019.

Construction output increased by 0.6% in Quarter 3 2019, following a 1.2% decline in Quarter 2. The quarterly increase was because of strength in new construction work, particularly in private new housing work and private commercial new work in the three months to September 2019. The latest Bank of England Agents’ summary of business conditions also reported strength in residential construction, with the development of lower-priced properties remaining strong, supported by the Help to Buy schemes. There have also been some revisions to the monthly path of construction sector growth, implying slightly weaker activity in July and August than previously estimated.

The expenditure measure of gross domestic product (GDP) increased by 0.3% in Quarter 3 (Jul to Sept) 2019. Private consumption, government consumption and net trade contributed positively to growth while gross capital formation (GCF) subtracted from GDP growth in Quarter 3 2019.

There were large swings in net trade and GCF in the first half of the year (Figure 6), reflecting movements of “unspecified goods” – which include non-monetary gold. The movements in GCF also reflect to a large extent the stockpiling and subsequent unwinding of stocks that took place in Quarter 1 (Jan to Mar) and Quarter 2 (Apr to June) 2019. While the pickup in GDP in Quarter 3 2019 was largely a result of net trade, this was unrelated to movements in unspecified goods.

Private consumption increased by 0.4% in Quarter 3 2019, broadly in line with its recent relatively subdued trend. The latest official figures show that retail sales grew at a moderate pace of 0.6% in Quarter 3 2019 compared with the previous quarter. Evidence from the latest Bank of England Agents’ summary of business conditions notes the weakness in retail sales in Quarter 3 compared with a year ago, citing “base effects from strong sales a year ago when there was a boost from warm weather and the football World Cup”. Meanwhile, the GfK Consumer Confidence Index improved two points to -12 in September 2019 with increases in all five measures underpinning the index.

The decline in GCF in Quarter 3 2019 broadly reflects a decrease in aligned change in inventories, which decreased for the second consecutive quarter as businesses appear to be continuing to run down stock levels. This follows the large increase in Quarter 1 2019, 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 unwinding of stocks in Quarter 3 2019 is reflected in external survey evidence. For example, the latest Bank of England Agents’ summary of business conditions states that the unwinding of stocks “contributed to weaker growth in manufacturing”.

Alignment 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 publication. When these adjustments are removed, the underlying data show a substantial decrease of £4.6 billion in stocks being held by UK companies in Quarter 3 2019 (Table 2).

Gross fixed capital formation (GFCF) fell by 0.2% in Quarter 3 2019, while business investment was flat, continuing its recent subdued performance (Figure 7). These figures should be interpreted with some caution as early estimates of business investment can be prone to revision.

External evidence suggests that investment intentions remained weak in Quarter 3 2019. For example, the latest Bank of England Agents’ Summary of business conditions reports that investment intentions remained at a nine-year low in the Quarter 3 2019. While members of the Bank of England Decision Maker Panel also reported that their recent investment growth has been subdued, businesses expected nominal investment growth to pick up a little to around 3.0% over the year to Quarter 1 2020.

Trade imports and exports have been volatile in the first half of 2019, in part reflecting the effects of movements of “unspecified goods” – which include non-monetary gold – in the first two quarters of the year. In Quarter 3 2019, the UK trade deficit narrowed to 1.2% of nominal GDP (Figure 8).

The narrowing of the trade deficit largely reflects strong export volume growth of 5.2% in Quarter 3 2019. Trade in goods exports grew 5.0%, reflecting increases in machinery and transport equipment and chemicals, while trade in services exports grew 5.3%; this was a result of “other business services”. External evidence points to weaker export growth than shown in the official estimates. The latest Bank of England Agents’ summary of business conditions states that manufacturing output and exports grew at their slowest rate in three years. Rising trade tensions were also a concern for exporters. The recent British Chambers of Commerce Quarterly Economic Survey reported weakness in manufacturing export orders.

Meanwhile, import volumes grew 0.8% in Quarter 3 2019, following volatility seen earlier in the year. Notable movements in the imports of “unspecified goods” – which include non-monetary gold – meant that there were large swings in imports in the first half of 2019. These “unspecified goods” have large and offsetting impacts to GCF 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. Growth in imports in Quarter 3 2019 reflected moderate growth in trade in goods, which grew 0.2% because of an increase in machinery and transport, as well as trade in services, which grew 2.3% following a sharp fall in Quarter 2 2019.

Government consumption increased by 0.3% in Quarter 3 2019, driven by higher spending in “healthcare and public administration”. In Quarter 3, the available expenditure data is a quarter in arrears; therefore, the latest data reported are based on budgetary forecasts rather than actual spending. As government departments provide updated information, actual spend (outturn) data become available and revisions are made to estimates previously published.

Growth in nominal gross domestic product (GDP) eased to 0.5% in Quarter 3 (Jul to Sept) 2019, following an increase of 0.7% in the previous quarter. The quarterly increase was a result of a 0.9% increase in compensation of employees. Wages and salaries grew by 0.9%, reflecting increases in public sector wages and salaries.

Gross operating surplus (GOS) of corporations increased by 0.1% and other income increased by 0.5%, reversing the decline in the previous quarter (Figure 9).

Release content

All data in this bulletin are seasonally adjusted estimates. Non-seasonally adjusted data are available within the UK Economic Accounts. These data can be downloaded directly from the UK Economic Accounts dataset and on the UK Economic Accounts main aggregates dataset table. Data published in the UK Economic Accounts reflect data as published on 30 September 2019 and are consistent with the data in this release up to Quarter 2 (Apr to June) 2019.

A number of other economic indicators were published on 11 November 2019; these include:

• GDP monthly estimate, UK: September 2019

• data for gross fixed capital formation (GFCF) by sector and asset, revision triangles and a real-time database

• Index of Services

• Index of Production

• Construction output in Great Britain

• UK trade

In Blue Book 2019 we made changes to the measurement of mixed income, compiling our estimates at a more granular level to better reflect the different components of mixed income such as income from self-employment, rental and income earned which is not present in tax data because of evasion. This change particularly impacted years post 2016 (the last year for which most of our structural tax sources are available) as forecasts and indicators are now used at a lower level of detail. We plan to make further updates to these estimates in the December Quarterly National Accounts release (in line with the revisions policy) and as part of Blue Book 2020. An article outlining these further changes and their impacts will be published on 20 November.

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

• the strengths and limitations of the data and how it compares with related data
• the 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 information

There are common pitfalls in interpreting data series; 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” subsection in the QMI 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 owing 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 3 (July to Sept) 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 because of a higher level of forecast content. The balancing adjustments applied in this quarter are shown in Table 3; the resulting series should be considered accordingly.