Growth in Monthly GDP in October Masks Risks to Q4 Outlook

Main points

• Though GDP in October grew by 0.5 per cent relative to September, this figure largely reflects the weakness in September resulting from the additional Bank Holiday for the State Funeral of HM Queen Elizabeth II. So, despite the seemingly positive outlook given by the monthly figure, our forecast suggests that the risk of a contraction in GDP in the last quarter of this year remains elevated.
• GDP contracted by 0.3 per cent in the three months to October, consistent with our forecast last month. This was driven by a 1.7 per cent decrease in production.
• The S&P Global/CIPS UK PMIs for November recorded headline business activity balances below the neutral 50 for both the manufacturing and services sectors and a balance of 50.4 for the construction sector. These figures point to a strong risk that anaemic business activity will drag on GDP growth in the fourth quarter of 2022.
• Despite survey data indicating that business confidence improved in November relative to the slump caused by the Truss government and its ‘mini-budget’, firms in all three sectors continue to have an overwhelmingly pessimistic outlook. Elevated prices, interest rates and uncertainty, which continue to limit household and businesses spending, alongside supply-side issues like labour shortages and strike action, all bode poorly for UK economic performance in the fourth quarter of this year. That said, we expect growth in the construction sector alongside the seasonal increase in consumption to result in GDP remaining flat in Q4.

“Monthly GDP grew by 0.5per cent in October, in line with our forecast last month, driven by a strong pick-up in wholesale and retail trade, and repair of motor vehicles and motorcycles, which seem to have been strongly affected by the additional September bank holiday. Despite this positive outlook from the monthly growth figure, there are still strong downside risks to GDP in the fourth quarter of this year due to high inflation and interest rates –which continue to supress demand –and supply chain disruptions, as well as work backlogs due to industrial action and a tight labour market –which continue to weigh on business growth. We still expect GDP to remain flat in the fourth quarter of this year."

Paula Bejarano Carbo
Associate Economist, NIESR

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