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UK economy: growth firm in 2018Q3 but set to slow in 2018Q4

Date: 19th November 2018

UK economy: growth firm in 2018Q3 but set to slow in 2018Q4
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest economic data:
  • GDP growth was a better-than-expected 0.6% (QOQ) in 2018Q3, supported by a pick-up in consumer spending (helped by the hot weather) and an improved trade balance. Business investment slipped 1.2% in the quarter.
  • The latest Markit surveys, however, suggest some slowing of activity going into 2018Q4.
  • The underlying labour market continues to tighten, despite an uptick of unemployment in 2018Q3. Employment growth continues, the unemployment rate is just 4.1% (2018Q3) and vacancies are strong.
  • The number of EU nationals in employment fell 132,000 (YOY) in 2018Q3, contributing to the tightening labour market, whilst the number of non-EU nationals in employment remains broadly flat.
  • Annual average earnings growth is picking up. Regular earnings rose 3.2% (YOY) and total pay rose 3.0% (YOY) in 2018Q3.
  • CPI inflation was unchanged at 2.4% (YOY) in October. Higher oil prices have pushed up producer prices, but inflationary pressures generally remain modest.
  • UK house prices increased by 3.5% (YOY) in September. House price growth has slowed over the past two years, led by weaker house prices in London (more specifically, inner London).
  • There are signs that global growth is moderating. Eurozone GDP increased just 0.2% (QOQ) in 2018Q3, within which German GDP fell 0.2%, French GDP increased 0.4% and Italian GDP was flat. US GDP growth moderated to 3.5% (annualised) in 2018Q3, but remained robust. Japanese GDP fell 0.3% in the third quarter, whilst China’s growth eased to 6.5% (YOY).
There were major developments on Brexit:
  • The draft Withdrawal Agreement (585 pages) and the “outline of the political declaration on the future EU-UK relationship” (7 pages), as agreed by the negotiators, were released on 14 November.
  • The Withdrawal Agreement included the financial settlement, the terms of the implementation (transition) period (to 31 December 2020) and the “backstop”.
  • If the future EU-UK relationship (to be negotiated after 31 March 2019) cannot be applied at the end of the transition period, there are two options. Firstly, the “backstop” will be applied or, secondly, the transition period may be extended.
  • The key features of the “backstop” are a single customs territory, wide-ranging regulatory alignment with the EU (to ensure a “level playing field”) and extra alignment conditions and checks for Northern Ireland.
  • The key features of the future EU-UK relationship include a free trade agreement (FTA), customs arrangements built on the single customs territory (as in the Withdrawal Agreement), and wide-ranging regulatory alignment built on the “level playing field arrangements” (as in the Withdrawal Agreement).
  • An extraordinary European Council summit to “finalise and formalise” the Brexit “deal” is planned for 25 November.
  • In addition, the European Commission published its contingency measures if a “No Deal” Brexit on 13 November 2018.

Ruth Lea said, “GDP growth in the third quarter was encouraging, but activity is expected to slow in the fourth quarter. Nevertheless growth continues. Real earnings growth should support the growth of household spending going forward, which will support GDP growth, even if there is some weakness in business investment.”
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Arbuthnot Banking Group PLC:

Ruth Lea, Economic Adviser
07800 608 674, 020 8346 3482
Follow Ruth on Twitter @RuthLeaEcon

Sam Cartwright
020 7379 4415
Jais Mehaji
020 7379 5151