UK GDP fell in August and with September’s additional bank holiday likely to have affected output, Q3 as a whole appears highly likely to have seen a substantial fall in GDP.
Underlying conditions remain challenging, with the marked tightening of financial conditions in recent weeks adding to an already-significant real income squeeze.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “GDP fell 0.3% month-on-month in August and with the latest release incorporating the recent ONS Blue Book revisions, this meant that the output measure of GDP was slightly lower than the pre-pandemic level. August's fall reflected output declines in both the manufacturing and services sectors.
“The fall in manufacturing output has been particularly significant, with three large monthly falls in a row echoing the recent weakness of the PMI. Reading through the monthly volatility, services output has been broadly flat since February, but this masks significant divergence at the sub-sector level. The retail and health sectors appear to have had notable struggles, with the latter exacerbated by lower spending on COVID-19-related activities, but the business services and IT sectors have continued to perform strongly.
“The EY ITEM Club expects a large month-on-month fall in GDP in September due, in part, to the extra bank holiday. The impact of this holiday is likely to have been larger than in June – when there was also an additional bank holiday – because many firms in the retail and hospitality sectors that remained open in June opted to close in September. Coming on top of August's fall, this is likely to mean there was a sizeable decline in GDP on a quarterly basis in Q3.
“While Q4 will see a mechanical rebound, given it is due to have a full quota of working days, this is likely to mask underlying weakness. High inflation continues to eat into household spending power, while the recent tightening in financial conditions could well add to the real income squeeze and potentially cause a house price correction.”