GDP quarterly national accounts, UK: April to June 2018

• UK gross domestic product (GDP) in volume terms was estimated to have increased by 0.4% between Quarter 1 (Jan to Mar) 2018 and Quarter 2 (Apr to June) 2018, unrevised from the first quarterly estimate of GDP.

• Growth in the latest quarter was driven by the services sector, which increased by 0.6%, due partly to an increase in retail sales.

• Household spending grew by 0.4%, while business investment decreased by 0.7% between Quarter 1 2018 and Quarter 2 2018.

• Nominal GDP grew by 0.8% in Quarter 2 2018, with compensation of employees growing by 0.7%.

• This release incorporates Value Added Tax (VAT) turnover data in the output approach to measuring GDP for the first quarter of 2018; GDP growth has been revised down to 0.1% in Quarter 1 2018, driven by a revision to the construction industry, which can in part be attributed to the inclusion of VAT turnover data.

• GDP was estimated to have increased by 1.7% between 2016 and 2017, unrevised from the previous estimate.

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.

The quarterly national accounts are typically published around 90 days after the end of the quarter. At this stage, the data content of this estimate from the output approach to GDP has risen since the first quarterly estimate to around 91% of the total required for the final output-based estimate. There is also around 90% data content available to produce estimates of GDP from the expenditure approach and around 70% data content from the income approach.

Further information on all three approaches to measuring GDP can be found in the short guide to national accounts.

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.

UK gross domestic product (GDP) is estimated to have increased by 0.4% in Quarter 2 (Apr to June) 2018, unrevised from the first quarterly estimate of GDP. Compared with the same quarter a year ago, the UK economy has grown by 1.2% – revised down slightly from the previously published 1.3%.

All figures since Quarter 1 (Jan to Mar) 2017 are open to revision in today’s publication. The headline figure for Quarter 2 2018 is unrevised at 0.4%, while the latest data show a slight upward revision to quarterly real GDP growth in both Quarter 1 2018 and Quarter 2 2017. All other quarters are unrevised (to one decimal place). The revision to Quarter 1 2018 brings growth back into line with the preliminary estimate of 0.1%.

Despite today’s revisions, the recent narrative on UK GDP remains unchanged – the underlying trend is still one of slowing real GDP growth. The UK economy grew by 0.5% in the first half of 2018 compared with the second half of 2017, which marked the weakest six-monthly growth since the second half of 2011. Figure 1 shows that quarter on same quarter a year ago GDP growth has been on a declining trend since the end of 2014, recording a revised 1.1% in the year to Quarter 1 2018 – the weakest rate since Quarter 2 2012.

The implied GDP deflator represents the broadest measure of inflation in the domestic economy, as 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 2 2018, the GDP deflator increased by 2.0%, up from the previous estimate of 1.7%. This was driven primarily by a 1.1 percentage points upward revision to the general government consumption deflator, which is now estimated to have increased by 2.1% in the year to Quarter 2 2018. This reflects a downward revision to Quarter 2 2017 – driven by updates to current price data for healthcare expenditure – resulting in a lower base. In contrast, volumes are largely unaffected as these are recorded directly – that is, the goods and services of healthcare consumed by patients are recorded, rather than being deflated. While growth in the year to Quarter 2 2018 was revised up, quarter-on-quarter growth in the general government consumption deflator remains unrevised.

The output measure of gross domestic product (GDP) grew by an unrevised 0.4% in Quarter 2 (Apr to June) 2018. This follows a soft patch earlier in the year, where the UK economy grew by a revised 0.1% in Quarter 1 (Jan to Mar) 2018. This downward revision has been driven by updated construction estimates, which is due largely to the incorporation of Value Added Tax (VAT) turnover data up to Quarter 1 2018, where VAT turnover data from approximately 85,000 businesses has now replaced data for 2,400 survey returns in the construction sample.

Despite the weaker construction outturn in Quarter 1 2018, the narrative on how industries have tracked over the past two quarters remains largely unchanged. There have been revisions to the estimates for energy supply in Quarter 2 2018, but Figure 2 reaffirms that there was a cold weather boost in Quarter 1 2018, which fell back in Quarter 2 due to warmer weather conditions.

Following changes to the GDP publication model, this is the first quarterly national accounts in which the revised monthly path for construction and production output have not been available in advance. These updated estimates will be published on 10 October 2018, along with any revisions to monthly figures for services output.

Today’s latest data show that construction output fell by 1.6% in Quarter 1 2018, revised down from a fall of 0.8% in the first quarterly estimate of GDP. This marks the weakest quarterly growth in construction output since Quarter 2 (Apr to June) 2012.

It was previously highlighted that the adverse weather conditions earlier in the year had some impact on construction output. The incorporation of more comprehensive administrative estimates from VAT returns appears to be in line with this view, with the impact on construction output in Quarter 1 2018 more marked than previously estimated.

Latest figures show that there was a bounceback in construction output in Quarter 2 2018, which increased by 0.8%. This is supported by external survey evidence such as the latest Bank of England Agents’ summary survey, which noted that recent dry weather had helped businesses “catch up on progress lost due to adverse weather-related disruption earlier in the year”. The Construction Purchasing Managers’ Index (PMI) for April 2018 also highlighted a recovery in construction activity following a snow-disrupted Quarter 1 2018, particularly for housebuilding but also in the commercial building and civil engineering sectors.

In the production sector, output fell by an unrevised 0.8% in Quarter 2 2018. However, this reflects offsetting revisions on a subsector level, with manufacturing growth revised up by 0.2 percentage points, and growth in water and waste management, and energy supply revised down by 1.1 and 0.6 percentage points respectively. The downward revision to energy supply has led to a more pronounced fall back from the cold weather boost to gas and electricity production in Quarter 1 2018 (Figure 2).

The recent picture in manufacturing remains unchanged, despite the upward revision in the latest quarter – Quarter 2 2018 still marks the second consecutive quarter of negative growth in the sector. This has not been seen since Quarter 1 2016 and largely reflects an easing in manufacturing export growth – consistent with the latest trade figures. The most recent Index of Production bulletin showed that growth in manufacturing export turnover (current prices, non-seasonally adjusted) has eased since early 2017, but remains above domestic manufacturing growth. The Bank of England Agents’ Summary survey reported that manufacturing export volumes growth eased in Quarter 2 2018, but “remained firm and outpaced growth for the domestic market”.

Latest figures also show a downward revision of 0.3 percentage points to total production growth in Quarter 1 2018, driven predominantly by a 3.0 percentage points downward revision to output in the water and waste management sector, primarily reflecting sampling improvements within these industries.

Growth in the services industries doubled to 0.6% in Quarter 2 2018, following relatively subdued growth of 0.3% in Quarter 1 2018. This was an upward revision of 0.1 percentage points compared with the first quarterly estimate and the strongest quarterly growth since Quarter 4 (Oct to Dec) 2016. The quarterly revision was driven primarily by accommodation and food services, which saw an upward revision of 2.0 percentage points. This revision reflects the incorporation of VAT turnover data up to Quarter 1 2018, which revised up the level of growth in March 2018 and impacted on growth in subsequent periods.

Retail trade was one of the areas identified as being affected by the adverse weather earlier in the year, with volumes falling by 0.3% in Quarter 1 2018. This was driven by a sharp decline in petrol sales, partly offset by a boost to online retail spending. Following this weakness in Quarter 1 2018, the retail industry bounced back in Quarter 2 2018, with output rising by 2.0% – driven by buoyant food and drink sales as consumers took advantage of the warm weather and World Cup celebrations. This is in line with external surveys such as the British Retail Consortium's (BRC) Retail Sales Monitor (RSM), which attributed the boost in demand for items such as beer, barbecues and summer clothing to these two factors, as well as the two Bank Holidays and the Royal Wedding. The Services PMI for June 2018 also noted that unusually favourable weather conditions had helped boost consumer spending.

Looking over the longer-term, growth in the services industries has now outpaced growth in the overall UK economy for two consecutive quarters, which has not occurred since Quarter 1 2016 (Figure 3).

External survey evidence for Quarter 2 2018 highlighted strength in business services and finance activity, particularly in relation to mergers and acquisitions, Brexit preparations and recent regulatory changes. However, the latest figures show that growth in the business services and finance sector slowed to 0.1% in Quarter 2 2018, following three consecutive quarters of being the largest growth contributor to overall services growth (Figure 4).

Business services and finance did not contribute to services growth (to one decimal place) in Quarter 2 2018, for the first time since Quarter 4 2009. The pickup in Quarter 2 2018 services growth was driven by distribution, hotels and restaurants, and transport, storage and communications (contributing 0.27 and 0.20 percentage points respectively).

The expenditure measure of gross domestic product (GDP) increased by an unrevised 0.4% in Quarter 2 (Apr to June) 2018. Private consumption and gross capital formation (GCF) both contributed positively to growth, while government consumption and net trade subtracted from growth (Figure 5).

Today’s latest figures reflect a 0.8 percentage points downward revision to government consumption growth in Quarter 2 2018, which had previously been estimated to have contributed positively to overall GDP growth. Within GCF, there was also a notable 1.2 percentage points downward revision to business investment growth, which is now estimated to have fallen by 0.7% in Quarter 2 2018.

Growth in household consumption was relatively subdued in 2017, as households faced weak growth in real wages and the inflationary squeeze on household budgets following the past depreciation of sterling. Household consumption growth slowed to 0.4% in Quarter 2 2018, following upwardly revised growth of 0.5% in Quarter 1 (Jan to Mar) 2018. The 0.3 percentage points upward revision to Quarter 1 2018 growth was due primarily to the incorporation of additional survey data and changes to the forecasting method for health insurance. Today’s figures show that the slowdown in household consumption seen throughout 2017 has stabilised in recent quarters (Figure 6).

Driving the pickup in growth in Quarter 1 2018 were miscellaneous goods (primarily life insurance), which accounted for over half of total household consumption growth in the quarter, and housing. These rises were partly offset by a 1.5% fall in restaurants and hotels expenditure in Quarter 1 2018, the weakest quarterly growth seen since the financial crisis.

Following strength in Quarter 1 2018, housing expenditure fell back in Quarter 2 2018, accounting for most of the slowdown in overall household consumption growth. This in part reflected a fall in energy use following the adverse weather earlier in the year.

Gross fixed capital formation (GFCF) is now estimated to have fallen by 0.5% in Quarter 2 2018, revised down from positive growth of 0.8% in the first quarterly estimate of GDP. Business investment has been revised down from positive growth of 0.5% to a fall of 0.7% in today’s latest estimates. This revision was driven by the receipt of additional survey data, which brings the response rate into line with that which is typically observed for the Quarterly National Accounts. This was one area that had been highlighted would see a lower response rate in the new first estimate, as a result of the changes to the GDP publication model.

To offset some of the revisions that you might expect from using data at an earlier point in the data collection period, we are investigating how we can better anticipate the likely impact of downwards bias in initial estimates due to large capital expenditure tending to be reported later in the collection period. We are also reviewing the ways in which we estimate for non-response to the Quarterly Acquisition and Disposal of Capital Assets (QCAS) Survey, as well as progressively moving the survey online to facilitate earlier response.

With these latest figures, Quarter 2 2018 marked the fourth consecutive slowing in business investment growth – with falling expenditure in the last two quarters. While external surveys suggest that this recent weakness may at least in part reflect uncertainty around Brexit, investment intentions remain modestly positive. Meanwhile, private dwelling investment was revised up in Quarter 2 2018, by 1.4 percentage points to a rise of 2.4%, while general government investment was revised down by 5.5 percentage points, to a rise of 1.3%. The revision to general government investment reflected updated data from central government and local authorities.

While GFCF subtracted 0.1 percentage points from GDP growth in Quarter 2 2018, Figure 5 shows that gross capital formation (GCF) – which includes changes in inventories and net investment of valuables – was the largest growth contributor in the quarter, with a positive contribution of 0.8 percentage points. This difference was due partly to a sharp rise in non-monetary gold (NMG), which is recorded within the national accounts as a change to valuables. An equivalent but offsetting impact is recorded within trade in goods and services, such that the impact of NMG on headline GDP is neutral. The increase in GCF also reflects the application of an alignment adjustment to changes in inventories. More information on the alignment adjustment is available in the Quality and methodology section.

General government consumption fell by 0.4% in Quarter 2 2018, primarily reflecting a decrease in other central government consumption (which includes items such as public administration, and water and waste management services). Growth in government consumption has been revised since the previous estimate of a rise of 0.4%. The largest contributors to this revision were central government other, and military defence consumption. This was driven by the receipt of additional monthly outturn data.

Net trade made a negative contribution of 0.6 percentage points to GDP growth in Quarter 2 2018, revised up from the first estimate of GDP. There have been revisions to the quarterly growth profile for both exports and imports throughout 2017 and 2018, which primarily reflect updated data from HM Revenue and Customs (HMRC) as well as the International Trade in Services (ITIS) Survey.

Today’s figures for trade in goods are consistent with UK trade figures published on 10 September 2018, while trade in services data have been updated. Total export volumes are now estimated to have fallen by 2.2% in Quarter 2 2018, reflecting a fall in both goods and services exports (by 2.6% and 1.9% respectively). This has been revised up from a fall of 3.6% in the first estimate of GDP. Figure 8 shows that virtually all of the decrease in goods exports in Quarter 2 2018 was due to machinery and transport equipment (mainly cars), which fell by 5.0% – the sharpest quarterly fall since Quarter 2 2011. This is consistent with the fall in manufacturing output in Quarter 2 2018.

Looking over the longer-term, Quarter 2 2018 marked the second consecutive quarterly fall in export volumes, which has not occurred since Quarter 4 (Oct to Dec) 2013. This follows relatively strong growth of 5.7% in 2017, which was the strongest annual growth rate since 2011. While goods and services both contributed to this softening in Quarter 2 2018, it was services that accounted for all of the fall in Quarter 1 2018. Meanwhile, import volumes recorded its third consecutive quarter of negative growth in Quarter 2 2018, falling by 0.2%.

Nominal gross domestic product (GDP) grew by 0.8% in Quarter 2 (Apr to June) 2018, revised up from the previously published estimate of 0.7%. This was driven by upward revisions to both compensation of employees (CoE) and gross operating surplus (GOS), and was partly offset by a downward revision to other income (other GOS and mixed income).

Growth in CoE was revised up despite a downward revision to the level of CoE in Quarter 2 2018, due to CoE levels in Quarter 1 2018 being revised down more. This reflected downward revisions to employers’ social contributions, mostly offset by upward revisions to wages and salaries. CoE growth is now estimated to have slowed to 0.7% in Quarter 2 2018, marking the second consecutive slowing in quarterly CoE growth (Figure 9).

Today’s latest figures show revisions to the quarterly profile of CoE across 2017 and 2018, reflecting updates to both the level of wages and salaries and employer’s social contributions. Wages and salaries have been revised up to reflect the incorporation of new data for the public sector and the alignment of private sector wages and salaries to comparable labour market data. Employers’ social contributions have been revised down due to the removal of upwards balancing adjustments previously applied to employer’s contributions from Quarter 1 (Jan to Mar) 2017 to Quarter 1 2018.

While CoE still contributed 0.4 percentage points to nominal GDP growth in Quarter 2 2018, it was taxes less subsidies that was the largest growth contributor (0.5 percentage points). Taxes less subsidies recorded its strongest quarterly increase since Quarter 1 2011 (4.5%), partly reflecting a bounceback from a weak Quarter 1 2018. This was driven by movements in taxes, which increased by 3.1% in Quarter 2 2018 following a 0.5% fall in the previous quarter.

Other income growth also slowed, but contributed positively to growth in Quarter 2 2018. Meanwhile, GOS contributed negatively to nominal GDP growth for the first time since Quarter 2 (Apr to June) 2017. However, this largely reflects the application of an alignment adjustment in the calculation of profits for private non-financial corporations.

Today’s figures also show an upward revision to annual nominal GDP growth in 2017, from 3.6% to 3.8%. This was driven by upward revisions across all main components – CoE, GOS, other income and taxes less subsidies.

The estimates quoted in this international comparison section are the latest available estimates at the time of preparation of this statistical bulletin and may subsequently have been revised.

All the areas included within our international comparisons saw positive growth in Quarter 2 (Apr to June) 2018, with Japan bouncing back to 0.7% from a negative 0.2% growth in Quarter 1 (Jan to Mar) 2018. The strongest growth seen in this quarter was 1.0% by the USA.

European Union (EU28) economies grew by an average of 0.4% in Quarter 2 2018. This means that average gross domestic product (GDP) growth between countries in the area has been positive for 21 consecutive quarters. G7 countries saw an average of 0.8% growth in Quarter 2 2018 – the strongest quarterly growth since Quarter 3 (July to Sept) 2014 (when it was also 0.8%). All G7 countries are above pre-economic downturn peaks except for Italy, whose GDP remains 5.3% below the pre-downturn peak (Quarter 1 2008).

The areas showing the biggest recoveries over this period are Canada and the US, up 19.5% and 18.1% respectively since the downturn. UK GDP is now 10.8% above the level recorded in Quarter 1 2008.

The data used for these international comparisons are gathered from the Organisation for Economic Co-operation and Development’s website excluding the data from the UK, which is compiled within Office for National Statistics.

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.

Business investment

Further details on business investment along with revision triangles and a real time database are available within the datasets of the Business investment release, published on 28 September 2018.

Quarterly sector accounts and balance of payments

The Quarterly sector accounts and Balance of payments releases were published on 28 September 2018.

Consumer trends

Estimates of household final consumption expenditure for the UK are also available in the Consumer trends release, published on 28 September 2018.

Monthly GDP

On 10 September 2018, estimates of Monthly GDP were published for July 2018. The Index of Services, Index of Production and Construction output in Great Britain publications covering the period up to July 2018 are also available.

International Passenger Survey

Estimates derived from the International Passenger Survey (IPS) are used to help measure exports and imports of travel services. The 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.

National Accounts articles

On 11 October 2018, we will publish an article discussing the Latest developments to UK National Accounts and Balance of Payments, changes to be implemented for Blue Book and Pink Book 2019.

Monthly GDP

The Monthly GDP release on 10 October 2018 will for the first time include contributions to growth, in addition to indices and growth rates. Contributions to growth will be available for all sectors published in the Monthly GDP 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 – 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 last 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 quarterly national accounts datasets in this release, have a target limit of plus or minus £2,000 million on any quarter. However, in periods where the data sources are particularly difficult to balance, larger alignment adjustments are sometimes needed. This has been the case for the income approach in Quarter 1 (Jan to Mar) 2017 and Quarter 2 (Apr to June) 2017, and the expenditure approach in Quarter 1 2018. To achieve a balanced GDP dataset through alignment, balancing adjustments are applied to the expenditure and income components of GDP as 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 size and direction of the quarterly alignment adjustments in Quarter 2 2018 indicate that in this quarter, the level of expenditure is lower than the level of output and income is higher than the level of output.

Table 2 shows the balancing adjustments applied to the GDP estimates in this publication. The quarterly and annual growth rates should be interpreted in the context of these adjustments.