News | Published August 11 2019

UK economy contracts for the first time in seven years

The Office for National Statistics has revealed that the UK economy has shrunk for the first time since the fourth quarter of 2012, with a 0.2 per cent fall between April and June.

Despite the contraction, chancellor Sajid Javid does not believe the UK economy will enter recession since this would require it to shrink for two consecutive quarters.

The shrinkage comes amid Brexit-related stockpiling and a slowdown in the automotive sector while the pound also dipped in value.

Speaking to the BBC, Javid said: "I am not expecting a recession at all. And in fact, don't take my word for it. There's not a single leading forecaster out there that is expecting a recession, the independent Bank of England is not expecting a recession. And that's because they know that the fundamentals remain strong.”

Increased stockpiles have been partially used up in the second quarter according to the ONS, while automotive companies have brought their annual shutdowns forward to April as part of contingency planning for Brexit.

Economists had predicted zero per cent growth for the second quarter as opposed to a shrinkage, following 0.5 per cent growth in the first quarter.

The Bank of England recently said that it expects the UK economy to yield 1.3 per cent growth this year, which is down on its 1.5 per cent yearly projection of growth which it published in May.

The ONS’ chief of GDP, Rob Kent-Smith, says that there has been a fall in manufacturing output.

Over the course of the year so far, GDP has also been particularly volatile, owed to abrupt changes in industrial activity after the original Brexit date of March 29 was pushed back to October 31.

Kent-Smith said: "Manufacturing output fell back after a strong start to the year, with production brought forward ahead of the UK's original departure date from the EU.”

He also revealed that the service sector, usually a strong performer, “delivered virtually no growth at all”.

Meanwhile, Javid added: "We saw some significant stockpiling by British businesses in anticipation of the Brexit that never was [on March 29], and now they're using those stockpiles, that is coming down.

"Of course, there are businesses out there that are taking Brexit into account when they're making decisions.

"We're seeing volatility in the figures and one of the best ways to actually end this volatility is to bring certainty around Brexit and make sure we leave on 31 October.”

The UK economy is not alone in seeing shrinkage at this time. French industrial output has fallen beyond expectations over June, while growth is slow in many countries.

Javid said: "This is a challenging period across the global economy, with growth slowing in many countries.

"But the fundamentals of the British economy are strong. Wages are growing, employment is at a record high and we're forecast to grow faster than Germany, Italy and Japan this year.”

Alpesh Paleja, lead economist at the Confederation for British Industry lobby group, also highlighted stockpiling and the automotive shutdown as the culpable factors.

He said: "Growth has been pushed down by an unwind of stockpiling and car manufacturers shifting their seasonal shutdowns.

"Nonetheless, it's clear from our business surveys that underlying momentum remains lukewarm, choked by a combination of slower global growth and Brexit uncertainty. As a result, business sentiment is dire.”

The Federation of Small Businesses has issued a plea to the chancellor for an emergency budget.

Its chair of policy and advocacy, Martin McTague, said that "Unless the chancellor steps in imminently with radical action, we could be heading for a chaotic autumn and a very long winter”.

Samuel Tombs, the UK chief economist at Pantheon Macroeconomics, has appealed for calm, saying that household spending was continuing to climb "robustly" [having grown 0.5 per cent this quarter] and that there was no cause for alarm.

Tombs highlighted stockpiling as a major factor in the economic contraction, saying the economy is “sluggish” but emphasising that it has "not stalled”.

He did concede that there was a 70 per cent chance of interest rates being slashed in January, given the fall in the value of the pound.

The currency has already hit a two-year low and it fell again by 0.2 per cent against the US dollar to a value of $1.2106.

Meanwhile, shadow chancellor John McDonnell has blamed the “dismal” economic results on “Tory incompetence”, saying that the government's Brexit strategy including Boris Johnson's willingness to leave the EU without a deal is "breaking the economy".

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Authored by

Scott Challinor
Business Editor
August 11 2019

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