Britain’s GDP growth is expected to return to sub-trend levels in the third and fourth quarters unless final demand picks up, according to Schroders.
Azad Zangana, a European economist at the firm, said the Office for National Statistics (ONS) recently revised up its estimate for British growth in the second quarter from 1.1% to 1.2%.
But he added the breakdown of GDP by expenditure components reveals a much more fragile recovery than headline numbers suggest.
“The [revised] second estimate showed stronger growth particularly in the construction sector, which grew by 8.5% — its fastest rate since the first quarter of 1982,” said Zangana.
“But of the overall 1.2% growth, only 0.2 percentage points was actual final demand while one percentage point came from the rebuilding of inventories, which usually happens after a severe spell of de-stocking. The boost from the inventory cycle tends to be very short-lived and so we expect to see a significant slowdown in the third and fourth quarters.”
Zangana said weakness in final demand came from the corporate sector, with business investment falling by 2.4% in the second quarter.
“It appears UK corporates have not yet found the confidence to invest, which means private sector job growth may continue to be sluggish,” he added. (article continues below)
“Finally, net trade made no contribution to growth, which will disappoint both the Bank of England and Office for Budgetary Responsibility, which expected sterling weakness to help raise exports.”
Despite these factors, the economist highlighted that, within the smaller contribution from final demand, household consumption has performed surprisingly well.
“This is supported by the recent Distributive Trade survey from the Confederation for British Industry, which found activity in the retail sector has been growing at a robust pace over summer,” he added.
Although Schroders expects a slowdown in growth, the group continues to see a double-dip recession as unlikely, especially in light of an improving household sector.