MNI DATA ANALYSIS: Construction Output Drags on Q1 Growth

--Q1 Growth underwhelms with underlying weakness, not snow, to blame

By Jai Lakhani

     LONDON (MNI) - UK growth disappointed in Q1, coming in at 0.1% on quarter,

0.2pp below analyst expectations, driven primarily by underlying weakness within

the construction and manufacturing sectors.

     On Friday the Office of National Statistics published its preliminary

estimate of GDP -- the output measure - with growth broken down across the

economy's four main industry sectors. Table 1 below shows this breakdown and

clearly highlights the main drag was provided by the construction sector,

shaving 0.2pp of overall growth.

     Table 1: GDP Output Measure Breakdown

                       Quarterly Change, %    Contribution to Growth, percentage

              Weight                   q/q                                points

--------------------------------------------------------------------------------

GDP             1000                   0.1

Agriculture        7                  -1.4                                   0.0

Production       140                  +0.7                                   0.1

Construction      61                  -3.3                                  -0.2

Services         793                  +0.3                                   0.2

     Bank of England Governor Mark Carney last week suggested any temporary

dampening in growth, as a result the extreme weather, could potentially be

looked through. The hard data delivered Friday, however, came with the caveat

from ONS statisticians that impact from the snow was "limited", stressing that

the data highlighted underlying weakness. Taken to three decimal places, Q1

growth stood at 0.112%, not even close to being rounded up to 0.2%.

     --COLD WEATHER BOOST

     Quantifying the snow impact, consumer-facing industries were hit hard, as

was the construction sector. However, the extreme weather actually boosted GDP

via the channels of increased energy supply and higher online sales.

     Moreover, according to the ONS there was no evidence of any snow impact in

the manufacturing sector while around half of the collapse in construction

output was delivered in January, before the snow arrived.

     Construction output has disappointed ever since the UK Brexit vote, but has

come in worse in recent months, thus in reality the 3.3% quarterly drop should

not have been a huge surprise. Excluding construction, and reweighting the GDP

series, total growth would have come in at a 'healthier' 0.3%.

     Output in the sector contracted in each of January (-3.1% m/m), February

(-1.6%) and the ONS predicted that output fell again in March (-2.3%). The 3.3%

drop in quarterly output was the largest since Q2 2012 but did follow strong

growth in December.

     January's slump was driven by a 4.0% m/m drop in all new work, which

accounts for around two thirds of total construction output. This came after a

record high 3.6% rise in December and so may reflect general month-to-month

volatility in what is a notoriously erratic series. On a

three-month-on-three-month basis, growth was up 0.3% in both January and

February, not a disaster by any means.

     Where there does appear to be a strong downward influence is in the repair

and maintenance channel, which covers the remaining third of overall

construction output. This declined for the seventh straight month in February

and has contracted for the last five on a three-month-on-three-month basis.

     --CARILLION EFFECT

     Asked by MNI how the recent collapse of construction giant Carillion would

have fed through into the construction numbers, ONS officials withheld any

information on the basis of survey participant confidentiality. They did say,

however, that its operations were broad-based and could theoretically show

through in more than one sub-component of the data.

     Perhaps more worrying will be the slowdown in manufacturing output which

has experienced somewhat of a renaissance over the past few months. With none of

this Q1 slowdown attributed to the snow it could suggest activity in the sector

is, ironically, starting to cool.

     Overall production partially masked the manufacturing weakness with

increases in both mining and quarrying, boosted by the reopening of the Forties

pipeline in January, and an increase in energy supply, but both are temporary

factors that will unwind in coming months.

     Finally, service sector growth, up 0.3% in Q1, was line with growth over

the past year but was based on output in March increasing by an unimpressive

0.1% m/m (which the ONS said was attributed to apparent weakness in computer

programming output). Given the recent blip in retail sales and a 20-month low

March services PMI print this March estimate may be tilted to the downside, in

which case would further drag on Q1 growth.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

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