Press release

10 Dec 2019 London, GB

UK economy off to poor start in fourth quarter as GDP flat month-on-month in October

The economy got off to a poor start in the fourth quarter as GDP was only flat month-on-month in October amid a number of uncertainties (domestic political, Brexit, and domestic and global economic problems).

Press contact

EY UK

Multidisciplinary professional services organisation

Related topics Strategy
  • The economy got off to a poor start in the fourth quarter as GDP was only flat month-on-month in October amid a number of uncertainties (domestic political, Brexit, and domestic and global economic problems). This marked the third successive month that the economy had failed to grow as it had previously suffered GDP drops in both September (0.2%) and August (0.7%).
  • Highlighting the weakness of the economy, year-on-year growth in GDP slowed to 0.7% in October, which was the weakest rate since March 2012; it was down from 0.9% in September, 1.1% in August and 1.3% in July.
  • The recent weakened performance of the UK economy was further evident in the three-month/three-month growth rate slowing to 0.0% in October from 0.3% in September.
  • GDP was primarily limited in construction output falling 2.3% month-on-month – there have been reports that the sector is suffering as a number of uncertainties are deterring clients from committing to new projects. Meanwhile, industrial output edged up 0.1% month-on-month with a 0.2% increase in manufacturing output. Services output saw growth of 0.2% month-on-month.
  • Adding to the generally disappointing news, the trade deficit in goods and services widened much more than expected to a 7-month high of £5.2 billion in October from £1.9 billion in September. Exports edged up 0.8% month-on-month while imports jumped 6.2% month-on-month. Imports of goods were up 8.3% month-on-month. While it is likely that imports were lifted by companies looking to guarantee supplies from overseas before the scheduled UK exit from the EU on 31 October, it is notable that imports of goods from the EU rose 4.4% month-on-month in October, while imports from non-EU countries spiked 12.7%.
  • The economy looks to have had a mixed November. The purchasing managers reported services, manufacturing and construction activity all contracted in November, but there are signs (particularly from the BRC and Barclaycard) that retail sales picked up and were robust over Black Friday week. However, a critical factor will be how much strong Black Friday sales brought forward retail sales from December rather than increasing them.
  • There  is a very real danger that the economy could stagnate in the fourth quarter. We had originally thought the economy could eke out GDP growth of 0.2% quarter-on-quarter in the fourth quarter, but this now looks on the optimistic side. Any growth in the economy in the fourth quarter is likely to be dependent on consumers – who have been the most resilient part of the economy – spending a decent amount over the critical Christmas period.
  • GDP growth is seen at 1.3% overall in 2019, the weakest performance since 2009.
  • Growth is seen slowing further to an 11-year low of 1.0% in 2020. This forecast is based on the assumption that the UK leaves the EU with a “deal” by 31 January and that a Conservative majority government emerges from Thursday’s general election. Even with a Brexit “deal”, the UK economy is likely to face a challenging and uncertain 2020. 
  • Even with a January UK exit from the EU with a “deal”, Brexit uncertainties are likely to remain appreciable during 2020, reflecting concerns over the UK’s longer-term relationship with the EU, while there could be a renewed Brexit cliff edge late on in 2020 as the transition arrangement is only due to last until the end of the year. In addition, a difficult challenging global economic environment is likely to weigh down on the UK economy. Consequently, business investment is likely to remain limited and exports challenging.
  • There is also a risk that UK political uncertainties could weigh on economic activity in 2020 if December’s general election fails to deliver a government with a clear mandate.
  • Meanwhile, although the fundamentals for consumers should still be relatively decent in 2020, we suspect they will not be as good as they were in 2019 with earnings growth modestly slower and the labour market softer. Consumers should benefit from ongoing moderate inflation.
  • On the positive side, fiscal policy is set to be supportive to growth in 2020. The economy is also unlikely to be hampered by higher interest rates in 2020; indeed if the Bank of England does act on monetary policy in 2020, it now looks most likely to be to cut interest rates.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

“The economy got off to a poor start in the fourth quarter as GDP was flat month-on-month in October. This soft performance looked even more sluggish given the fact that GDP had previously contracted 0.1% month-on-month in September and 0.2% month-on-month in August. While the economy had grown 0.3% quarter-on-quarter in the third quarter, this was heavily dependent on 0.3% month-on-month expansion in July and it was clearly stuttering at the end of the quarter.

“Year-on-year growth in GDP slowed to 0.7% in October, which was the weakest performance since March 2012; it was down from 0.9% in September, 1.1% in August and 1.3% in July. It is down from a peak of 2.4% in both March and February.

“The recent weakened performance of the UK economy was evident in GDP being only flat on a three-month/three-month basis in October, compared to growth of 0.3% in September.

“The economy looks to have had a somewhat mixed November. The purchasing managers reported services, manufacturing and construction activity all contracted in November, but there are signs (particularly from the BRC and Barclaycard) that retail sales picked up and were robust over Black Friday week. However, a critical factor will be how much strong Black Friday sales brought forward retail sales from December rather than increasing them.

Construction contraction held back economy in October, modest growth in industrial production and services output

“GDP growth in October was held back by construction output contracting 2.3% month-on-month and 2.1% year-on-year; this followed a drop of 0.2% month-on-month in September. Domestic political and economic uncertainties are reportedly leading to client caution in committing to new projects, particularly in the commercial sector. New construction orders were reported to have edged up just 0.3% quarter-on-quarter in the third quarter after plunging 14.5% in the second quarter; they were down 6.8% year-on-year.

“Manufacturing output rose 0.2% month-on-month in October; this was a lacklustre rebound after a dip of 0.4% month-on-month in September and it could also have been modestly boosted by some stockbuilding ahead of the UK’s scheduled departure from the EU on 31 October. Consequently, manufacturing was still down 1.2% year-on-year in October.

“Overall industrial production rose 0.1% month-on-month in October after a dip of 0.3% in September; it was down 1.3% year-on-year. As well as the 0.2% rise in manufacturing output, there was month-on-month growth of 2.4% in utilities output. However, mining and quarrying output contracted 4.2%.

“Output in the dominant services sector rose 0.2% month-on-month in October having been flat in September; year-on-year growth was 1.3%. Even so, the three-month/three-month growth rate for services was just 0.2%. There are indications that domestic political and Brexit uncertainties as well as concerns over the domestic economy have been weighing on demand for business services. It has also been reported that consumers have shown signs of caution over spending on more expensive services items.

“Adding to the generally disappointing news, the trade deficit in goods and services widened much more than expected to a 7-month high of £5.2 billion in October from £1.9 billion in September. Exports edged up 0.8% month-on-month while imports jumped 6.2% month-on-month. Imports of goods were up 8.3% month-on-month. While it is likely that imports were lifted by companies looking to guarantee supplies from overseas before the scheduled UK exit from the EU on 31 October, it is notable that imports of goods from the EU rose 4.4% month-on-month in October, while imports from non-EU countries spiked 12.7%.  

Growth outlook

“We expect GDP growth to be limited to 1.3% in 2019, which would be the weakest performance since 2009 and down from 1.4% growth in 2018. The economy got off to a poor start in the fourth quarter amid a number of uncertainties (Brexit, domestic political, global economic) after stuttering in the latter part of the third quarter.

“We now expect fourth-quarter GDP growth to be 0.1% quarter-on-quarter at best, and there is a very real possibility that the economy could stagnate in the fourth quarter.

“Growth is seen slowing further to an 11-year low of just 1.0% in 2020. This forecast is based on the assumption that the UK ultimately leaves the EU in the first quarter of 2020 with a “deal” and that a Conservative majority government emerges from Thursday’s general election.  

“Even with a UK exit from the EU with a deal by the end of January, Brexit uncertainties are likely to remain significant through 2020. There are likely to be concerns over the UK’s longer-term relationship with the EU, while there could be a renewed Brexit cliff edge late on in 2020 as the transition arrangement is only due to last until the end of the year.

“This is likely to limit any upside for business investment coming from a Brexit “deal”. In addition, we suspect that a difficult global economic and trading environment will also weigh down on business investment in 2020 as well as hampering UK exports. There is also a risk that UK political uncertainties could weigh on economic activity in 2020 if Thursday’s general election fails to deliver a government with a clear mandate.

“While the fundamentals for consumers should still be relatively decent in 2020, things probably got as good as they get for consumers in the third quarter of 2019. We suspect earnings growth will ease back from the 11-year high of 3.9% seen in the three months to July (it was 3.8% in the three months to August) while the labour market is expected to be softer in 2020.

“On the positive side for growth prospects in 2020, fiscal policy will be supportive to growth.

“Additionally, the economy is unlikely to be hampered by higher interest rates in 2020; indeed, if the Bank of England does act on monetary policy in 2020, it now looks most likely to be to cut interest rates from 0.75%. However, we currently lean towards the view that interest rates are most likely to stay at 0.75% through to 2021.”