UK update: GDP still stalling, house prices fall faster

Still stalling: The UK economy continued to struggle for momentum through the middle of the third quarter. It remained trapped in the crosscurrents of two unusual large shocks: 1) the fading supply-side shock to global energy markets caused by the Russian invasion of Ukraine; and 2) the accumulating demand-side drag from the BoE’s tightening of monetary policy. UK real GDP increased by 0.2% mom in August following the 0.6% dip in September. The data are in line with our and Bloomberg consensus expectations. Output rose by 0.3% on a 3m/3m basis. However, due to the abnormally high volatility in the monthly pattern of activity even the 3m/3m trend does not provide a clear picture of the underlying trend. GDP has de facto stalled for the whole year so far – a pattern that is also visible across major sectors (Chart 1). The level of real GDP in August was 1.7% above its January 2020 pre-pandemic level, but unchanged since January 2023. As our base case, we expect a 0.1% qoq decline in Q3 with no change in output between August and September. The risks to this call are two-sided judging by the contrast for September between weaker PMI data (Chart 2a) and rising business and consumer confidence (Chart 2b).

Less bad than the August PMIs – but mind the signals: The flat trend in monthly real GDP stands in contrast to the downward trend in PMI data between May and August in which the headline composite reading declined from 53.9 to 47.8. The fall in the manufacturing output PMI from 46.5 in July to 43.3 in August is consistent with the August sector output estimates. Manufacturing declined by 0.8% mom in August after a 1.2% drop in July. Overall industrial production fell by 0.7% mom following a 1.1% fall in July. The PMI-GDP gap is thus mainly due to services. Services activity rose 0.4% mom in August after a 0.6% mom fall in July – whereas the services PMI slid sharply from 51.5 to 48.7. Looking at the sub-sector data, the major contributors to the monthly rise in services activity during August were professional, scientific and technical activities, as well as education. Education output jumped 1.6% mom after a fall of 1.7% in July. The slump and rebound in education is largely due to the August strike action by teachers in public education. Since the PMI services survey only captures private education output, this oddity would not be reflected in the headline PMI balance. However, this is not a large enough factor to explain the PMI-GDP gap. Education contributed just 0.1ppt to the overall mom rise in services. But a gap between the PMI survey and official data is nothing new. For instance, the sharp rise in PMI data the start of the year wrongly signalled the start of a solid uptrend in activity. In all likelihood, PMI data – especially for services – are distorted by the gyrations in sentiment caused by the unusual risk environment, and hence provide only a rough guide to near-term activity trends.

In the very near-term, risks are skewed to the downside. While we expect output to continue to stagnate through winter, we cannot rule out the risk of a mild technical recession. Through spring and summer next year, cumulating real income gains as inflation subsides further and less tight monetary policy from Q2 onwards as the BoE begins to gradually take its foot off the brake can support a gradual recovery in real GDP.

Housing market – still waiting for the bottom: The closely-watched RICS housing market survey points to further sharp falls in house prices during September. The headline house price balance declined to -69% in September from -68% in August. As our base case for the unfolding housing market correction, we project a 10% peak-to-trough fall in house prices with risks skewed towards a 12% drop. As Chart 3 shows, the further decline in September is consistent with our risk scenario. However, judging by the details of the survey, September may mark the worst month for price declines, with the pace of falls moderating in coming months. Price expectations for the three months ahead rose to -48% in September form -65% in August – Chart 4 – with a similar uptick for 12-months-ahead expectations. While still subdued, new buyer enquires as well as new instructions also edged higher – Chart 5.

We expect house prices to bottom early next year before activity and prices gradually improve through 2024 and 2025 on the back of a broader economic recovery. However, the recovery in demand and transactions may be more restrained than in previous housing market cycles. If the UK economy manages to dodge a recession over winter, still-present inflation risks will prevent the BoE from cutting rates as aggressively as during previous easing cycles. Mortgage rates that are closer to the longer-run average will restrain borrowers’ capacity for a few years until wages catch up by enough to bring price-income ratios to a more attractive level.

Kallum Pickering
Senior Economist, Head of ESG & Data, Director

Mobile +44 791 710 6575

Phone +44 203 465 2672

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