Unexpected Drop in Manufacturing Worsens Q3 Outlook

Main points

• GDP contracted by 0.3 per cent in August, worse than our forecast last month of no change between July and August. This unexpected dampening was driven by a significant drop of 1.6 per cent in manufacturing, though a sharp decrease of 8.2 per cent in mining and quarrying may have also contributed to overall reduced output in production.
• Seeing as the S&P Global/CIPS UK Manufacturing PMI for September registered a figure below the neutral 50 for the second consecutive month, and its global counterpart recorded a 28-month low in the new-orders-to-inventory ratio, there are signs that sluggish demand in the production sector will continue to drive recessionary risks in the third quarter of 2022. It is notable that these surveys attribute Brexit-related difficulties as having disrupted the possibility of boosting UK production demand via trade despite the recent depreciation of sterling.
• As the UK economic outlook worsens, heightened uncertainty continues to weigh on business and consumer confidence. September PMIs recorded two-year lows in business expectations and confidence for the year ahead for services and construction sectors, respectively.
• Despite the negative outlook for the third quarter of this year, we expect the energy price guarantees for households and firms announced in September’s fiscal event to drive GDP growth higher in the fourth quarter. The extent to which the measures in the mini-budget will counter the dampening effects of plummeting confidence and increased interest rates will become clearer over the coming months.

“GDP contracted by 0.3% in August, possibly signalling the beginning of an economic recession. The significant drop in private sector output was led by an unexpected contraction of 1.6 per cent in the manufacturing sector – a percentage point worse than we had forecasted last month. Given that September PMIs point to further decreases in this sector due to rising uncertainty, weakened economic conditions and increases in borrowing rates, it is likely that UK manufacturing will continue to drag on the real economy in the third quarter.  But, despite this negative outlook, we expect the fiscal expansion announced in the recent mini-budget will cut the recession short and UK GDP will see positive growth in the fourth quarter of this year.”

Paula Bejarano Carbo
Data Analyst, NIESR

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