UK to see modest growth in Q2, slowdown likely to be temporary

UK second quarter started off on a bad note as the manufacturing and construction sectors performed poorly in April. Office for National Statistics data showed that manufacturing rose by just 0.2 percent in the month, while construction output dropped by 1.6 percent. The drop came in despite purchasing managers’ index surveys suggesting an improvement in momentum in April. Data suggests that GDP growth in Q2 may not see a big improvement as previously thought.

That said, the extent of slowdown is probably exaggerated as it follows what looks to have been erratically strong rises in November and December of year 2016. Manufacturing activity has picked up across a number of other economies in the eurozone in the recent months. The US also started the year on a firm footing. This suggests that there has been a rebound in demand for manufactured goods

Business surveys also point to a rise in export orders which indicates that international demand for UK manufactured goods is rising. UK trade data showed that exports stayed flat at £49.8bn in April while imports dipped from £53.7bn to £51.9bn, narrowing the deficit to £2.1bn. Volatility in monthly trade data cannot be ruled out as large orders of goods such as aircraft can sway the national figures. A combination of stronger world trade growth and the competiveness boost that should follow from sterling’s depreciation of last year are positive signals for manufacturing exports.

Meanwhile, manufacturing continues to face a number of headwinds including difficulties in recruiting staff, sluggish productivity growth and ongoing concerns about the impact of Brexit. Employers face a triple whammy of uncertainty over the last few months – a snap election, the triggering of article 50, and weak economic data for the first half of 2017. Surveys showed stark contrasts between sectors. Manufacturers were most optimistic about hiring but the outlook for the public sector was far gloomier, with a majority of employers looking to cut jobs.

"Recent manufacturing performance has been patchy due to variable impacts from sterling depreciation, a slowing domestic market and an uneven international upturn.  Business surveys, however, paint a rosier picture including robust orders growth. This suggests that any slowdown will be temporary," said Lloyds Bank in a report.

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