RBS forecasts third successive quarter of GDP contraction, all-important services sector is however seen growing

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Category: Financials

Published on Friday, 29 June 2012 13:08

Written by Will Peters

The UK economy must brace itself for yet another quarter of negative growth warn analysts at RBS.

The latest RBS 'GDP Tracker:UK' is signalling a third successive quarter of contraction: -0.2 pct q/q in Q2.

According to the bank, the main drag stems from construction output. In addition, industrial output is expected to decline, led by a hefty fall in manufacturing output.



But, the all-important service sector appears on track to achieve modest growth in Q2, but doubts persist about the durability of consumer demand and the willingness of the corporate sector to boost investment.

RBS say a 0.2 pct fall would take the level of GDP to a two-year low.

Ross Walker at RBS says:

"The GDP Tracker is signalling a third successive quarterly contraction in GDP (-0.2%). The preliminary ONS estimate will be published on 25 July. On our preferred measure of GDP excluding the volatile energy and construction sectors, the Tracker is signalling growth of 0.1 pct in Q2, following expansion of 0.2 pct in Q1."

A 4.9 pct q/q fall in Q1 in construction might have been expected to be followed by some level normalisation in Q2.

"In fact, ONS construction output fell a hefty 18.1 pct m/m in April (seasonally-adjusted). Our Tracker assumption of rebounds in May (5% m/m) and June (7% m/m) in line with the experience in 2010 and 2011 would still mean a Q2 contraction of 4.0 pct, subtracting 0.3pp from quarterly GDP. This degree of weakness is not reflected in the business surveys, nor the official employment data," says Walker.

Services output stalled in April but base effects mean that some tepid growth is likely in Q2.

"This would be consistent with the survey data, which suggest sub-trend growth rather than contraction though the surveys have not been particularly reliable predictors of the official services data in recent quarters. Consumer-facing sectors appear to have fared relatively well some 'real-terms' indicators have been supported by lower inflation, Jubilee-related expenditure may have also provided a boost. Overall, the Tracker is signalling services output growth of 0.3% q/q (downside risks)," says Walker.