UK growth set to slip as construction downturn erodes earlier gains

Outlook for UK GDP

The modest improvements the UK economy recorded earlier this year look set to be partially unwound, as a sharp contraction in construction activity threatens to drag overall growth into reverse. Economists polled by Bloomberg expect GDP to have fallen by 0.1% in June, a drop that would partly erase the small gains posted in the first half of the year.

Pantheon Macroeconomics warned that a pronounced fall in construction output would be the key downward driver, while services and production are expected to stagnate. New official GDP figures for June are due to be published on Thursday and will clarify how widespread the weakness has been.

The construction sector has struggled for some time, with firms reporting job cuts even as recent official releases showed modest improvement output rose 1.6% in the three months to May. Despite that, forecasts in the Bloomberg poll project construction output may have declined by as much as 0.7% in June alone.

Accommodation and food services are also expected to weigh on the headline number, though higher consumer spending tied to the World Cup could produce an upside surprise for the services sector. Overall, weak readings in several major services subsectors are likely to unwind the possibly erratic 0.1% growth recorded by the Office for National Statistics in May.

Deutsche Bank economists noted that certain consumer-facing categories clothing retailers, pubs and art galleries probably benefited from warm weather in June, which helped to blunt a steeper fall in activity. Sanjay Raja at Deutsche Bank added that rising retail sales and household consumption should provide a modest boost to second-quarter growth, even as business investment remained subdued.

Can the economy still beat expectations?

Despite the risks, there are reasons some forecasters expect the UK to outperform previous projections for the second quarter. The economy grew 0.6% in the first quarter, outpacing consensus, and some think tanks and City economists who had forecast only around 0.2% growth for Q2 may be forced to revise up. Economists polled now expect around 0.4% growth for the quarter, a view that implies the economy could shake off concerns that geopolitical shocks such as instability around Iran would derail activity.

Barclays economist Jack Meaning cautioned that some forecasts have relied heavily on S&P Globals purchasing managers index (PMI), which he argued has recently failed to capture the true changes shown in the official data. Deutsche Bank also pointed to a steady flow of announced strategic investments in data centres, clean energy and advanced manufacturing suggesting larger, long-term projects are still arriving even as broader corporate spending remains cautious amid elevated uncertainty.

Deutsche Bank expects a modest contraction of 0.5% between April and June, after 0.7% growth in the first quarter, while acknowledging that government spending and pockets of household strength could offset some weakness.

Policymakers and market participants will be watching the imminent June GDP release closely: a downside surprise driven by construction would underline the fragility of the UK recovery, while a stronger-than-expected print would support the view that domestic consumption and selective investment helped sustain momentum through the early summer.