U.K. economy makes soft start of Q2, GDP growth contracts sequentially in April

The U.K. economy made a weak start to the second quarter, showed the latest activity data, with GDP shrinking 0.4 percent sequentially in April to record its steepest monthly fall since March 2016. The outturn was softer than consensus expectations of a 0.1 percent drop. Therefore, the rolling GDP growth rate eased to 0.3 percent in the three months to April from the 0.5 percent rate seen in the initial three months of the year.

Delving into details, the sectoral breakdown also saw disappointing figures. Industrial production fell 2.7 percent sequentially, while construction output recorded a second successive decline, falling 0.4 percent in April after March’s fall of 1.9 percent. In the meantime, the services sector – which accounts for about 80 percent of the economy, saw a flat growth in April after contracting 0.1 percent in March.

The fall in industrial activity is especially acute and reflected a 3.9 percent sequential fall in manufacturing activity, where 11 of the 13 industries saw drops in output. The biggest was in transport equipment, with the 13.4 percent monthly fall reflecting a 24 percent fall in vehicle production.

“Overall, today’s data suggest that the pace of GDP growth slowed sharply in the second quarter, a view also captured by surveys of business activity – including the PMIs and the Lloyds Business Barometer – which have continued to soften in Q2”, said Lloyds Bank in a research report.

Admittedly, a couple of temporary factors might be overstating the softness reflected in today’s report. Firstly, several car manufacturers brought forward their seasonal shutdowns from August to April in order to cope with any disruption that might have occurred from a possible 29th March Brexit.

“Moreover, the run up in inventories – also related to a potential UK exit from the EU at the end of March – is likely to have unwound somewhat in April, thereby further weighing on factory output. Therefore, a return to more ‘normal’ activity levels particularly in car production is likely to see manufacturing activity bounce back in May”, noted Lloyds Bank.

Such volatility in the U.K. economic data is expected to stay a feature for some time still, especially given increased uncertainty over the outlook, mainly around the eventual timing of the U.K.’s withdrawal from the EU and the form that any future trading relationship will take.

“Nevertheless, given the weak start to Q2 captured by today’s report, there are risks that the pace of GDP growth in the second quarter could undershoot both the Bloomberg consensus and the Bank of England’s current forecast of 0.2 percent q/q”, added Lloyds Bank.

At 13:00 GMT the FxWirePro's Hourly Strength Index of British Pound was highly bearish at -158.986, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bearish at -55.8351. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex