RBS takes a closer look at the UK GDP report

The UK released its second look at third quarter GDP today. The main reading of 0.5% q/q was inline with estimates but the sub-components offered some valuable lessons. RBS economists dug into the report and warned that the economy lost momentum this year.

Their preferred measure is GDP ex-oil and gas. They note that it rose just 0.4% q/q and that's that third successive quarter of sub-trend expansion. If that pace is maintained through year-end, growth will be just 2.1% this year, the slowest since 2012.

"Whatever the output gap is, it is probably larger now than at the start of the year," they wrote.

The output gap is a term the BOE uses to measure slack in the economy. More slack means more time before a rate hike.

Components

UK manufacturing remains a dud and has now contracted for three consecutive quarters. The bigger worry might be construction, which fell 2.2% in the quarter, unchanged from the preliminary report. It's "far from clear why the slowdown in construction is so acute," they said.

On trade, they said worries are overblow. The 1.4% drag in the quarter was the largest ever but it's simply a give-back from the 1.4% rise in Q2. Importantly, consumer spending and investment were both a tick stronger than expected.

They're puzzled by the 1.3% q/q rise in government spending given the tightening fiscal backdrop.

Nominal growth

Nominal GDP y/y

This metric gets more and more attention. Measures are adjusted for inflation but nominal growth isn't. This year, they now expect it around 3.5%. That's around a percentage point below trend and a three-year low.

The takeaway is that lowered commodity prices should have given the economy a chance for good inflation-free growth. The inflation-free part remained but growth was sluggish. That's a worrisome sign for the future.

"Nominal GDP growth remains a little lacklustre, suggesting that underlying inflation pressures will remain subdued over the next year or so," they wrote.

That's negative for the pound and prospects for BOE hikes in 2016.