What to expect from Friday’s UK growth numbers

Looking ahead to Friday’s first quarter UK GDP data, one question really stands out: how much stockpiling really happened ahead of the original March Brexit deadline?

On the face of it, the answer appears to be “quite a lot”. Recent PMIs indicated that inventories increased at an unprecedented pace - no G7 economy has matched it in the surveys' history. This came amid increased concerns about the risk of a ‘no deal’ Brexit, where firms increased stocks of components and finished goods to insulate themselves against possible supply-chain disruptions.

It also appears that much of the activity was reasonably last minute. According to the Bank of England, roughly half of companies believed they were ready for ‘no deal’ around the turn of the year. That figure rose to 80% by the time of the Bank’s March policy meeting.

Putting these two pieces of information together suggests that we could be in for a bumper growth figure for the first quarter. However, there are a few reasons to think the actual scale of stockpiling may not have been quite as large as the surveys suggest.

Firstly, while the PMIs told us that a number of firms were boosting inventory, we suspect not all were able to do so by that much. Anecdotally, a number of companies reported that stockpiling activity had been constrained by limited warehousing availability. Storage space has been in short supply in recent years following the rapid shift towards online shopping.

The latest Bank of England credit conditions survey also suggested that while demand from corporates for inventory finance increased, it wasn’t by an unprecedented amount. That tentatively suggests that either firms financed the extra purchases with cash reserves, or that they didn’t stockpile to the extent that some other surveys had suggested.

Finally, whatever inventory building took place, by definition a large chunk of it will have been imported from the EU. That implies that the impact on domestic demand could be more limited – although that said, Bank of England analysis indicates that real exports also increased during the first quarter, as firms on the other side of the channel prepared for possible ‘no deal’ disruption.

The upshot is that the stockpiling effect may not have been quite as significant as some surveys suggest, although in any case, whatever inventory boost there was is likely to be reversed through the second quarter.

Away from inventories, the business investment picture continues to look pretty bleak. This component fell in every quarter of 2018 and probably did so again during the first quarter. 'No deal' Brexit preparations will have been costly but will have also have taken up a lot of companies' bandwidth, limiting appetite and scope to invest in other projects.

While we think the risk of a 'no deal' Brexit in October is relatively low, firms are likely to continue preparing for the worst-case scenario. There is a risk that business investment continues to decline over the next couple of quarters.

There is some good news though. Retail sales fared surprisingly well through the first quarter, helped along by rising wage growth and a solid jobs market backdrop. That should lift the consumption component of GDP, and the temporary dip in Brexit noise could help consumer confidence recover a little in the near-term, potentially unlocking some further modest spending growth over the coming few months.