The second estimate of UK GDP for the second quarter of 2015 was unchanged from the first; confirming our expectation that growth had picked up to 0.7% q-o-q, from 0.4% in 2015 Q1.
Consumer spending was a key driver of growth, expanding by 0.7%, following a rise of 0.9% in 2015 Q1. These figures are in line with our forecast for consumer spending growth of 2.7% in 2015, supported by recovering household incomes which we project will rise by 3.4% in 2015. The combination of strong underlying labour market conditions (read more on our blog here) and higher wage growth should continue to boost incomes. Spending will also be buoyed by strong confidence, low borrowing costs and very subdued inflation.
Alongside this, there was an encouraging 3.9% bounce-bank in exports, which has helped to reduce the trade deficit to its lowest level in 2 years. However, we feel this is more likely to reflect a correction from a very weak performance over the past year and hence it is too soon to herald an emerging recovery in exports. In our view, conditions for exporters are set to remain challenging, due to sluggish demand from the EU, the strength of sterling and more recently the increasing concerns over the health of the Chinese economy which could impact on the global economy.
Business investment continues to surge ahead
While there has been more of a mixed picture on the investment front, the key area of business investment has continued to expand at a brisk pace. Overall investment growth slowed to 0.9% in 2015 Q2, down from 2% in the previous quarter. This reflects a setback to both government and housing investment. However, business investment continued to surge ahead, rising by 2.9% in 2015 Q2, up from 2% in the previous quarter. Low borrowing costs and upbeat corporate sentiment should support further growth in business investment in the forthcoming months.
Looking ahead, the absence of inflationary pressures and possibility that the timing of the Bank of England interest rate rises may be pushed back will further boost the outlook for consumers. Hence, we feel that the outlook for the services industry remains good even though the latest service sector PMI survey suggests activity may have cooled off a bit at the end of the summer. In contrast, recent concerns over the health of the Chinese and global economy have added to the downside risks to exports. So while the UK recovery should remain on track for the rest of the year, we maintain our expectations that we will return to a more familiar pattern of unbalanced growth, driven largely by consumer spending. GDP growth is forecast to average 2.7%.