We estimate that the UK economy grew by 0.6% in the second quarter of this year. This is somewhat better-than-expected, with forecasts from the beginning of the quarter pointing to near economic stagnation. Robust data for both services and production output in April look to have driven growth, with signs of a slowdown through May and June.
A very different tone for Q3
In our view, the turmoil since last month’s EU referendum means that Q2 GDP data are likely to be little more than a statistical curiosity. Indeed, survey based evidence points to a sharp drop in consumer confidence, with results from market researcher GfK suggesting that the UK has suffered the largest drop in consumer confidence since December 1994. As the first chart highlights, its headline index has fallen sharply between the survey conducted before the referendum (when a vote to ‘Remain’ seemed the most likely outcome), and the survey conducted on 29 June — the results of which were published today.
Under our central scenario, we assume that the UK narrowly avoids recession, with a weaker currency cushioning the blow from reduced consumer expenditure. Survey based evidence also points to a drastic reduction in the number of job adverts since the UK’s referendum, reflecting defensive behaviour by corporates. With the future of the UK economy highly uncertain, investment is likely to be severely reduced until businesses have a clearer picture of what lies ahead.