Consumer spending still leading the way

The second estimate of GDP was unrevised from the first, confirming growth at 0.5% q-o-q in 2015q3, after 0.7% in 2015 Q2. Solid growth in services at 0.7% outweighed weakness in manufacturing, where output shrank by 0.4%.

Analysis of the expenditure components of GDP shows that consumer spending was the main growth driver, expanding by 0.8%, similar to the rate seen in recent quarters. Other domestic components also showed marked expansion: Investment grew by 1.3%, within which business investment rose by 2.2%, while general government spending was 1.3% higher.

The main challenge on growth was net trade with the deficit increasing by £6.6bn from the second quarter to £14.2bn as the pound’s strength and faltering global demand seriously hampered exports while imports rose in line with strong consumer demand and buoyant investment. Conditions for exporters are set to remain challenging as demand from the key EU market remains lacklustre, while global trade in general is exceptionally weak as the slowdown in China has adverse repercussions for many other important trading economies.

Against this weak trade backdrop, economic growth in the current quarter and into next year will remain highly dependent on domestic demand. However, conditions are favourable for a continuation of recent strength. Investment will benefit from high confidence, low borrowing costs and subdued inflation while consumer spending will be buoyed by the absence of inflationary pressures, still healthy employment growth, rising earnings and the probability that any interest rate hike will be deferred until the third quarter of 2016.

We therefore expect overall economic progress to remain solid with quarterly growth, though held back by weak exports, to average near 0.6% in the year ahead.