UK economy shrinks for first time since 2012 as fears of no-deal Brexit chaos mount

Britain’s economy unexpectedly shrank 0.2 per cent in the second quarter – its first contraction since the last quarter of 2012, when GDP fell by the same amount. GDP last fell by more in early 2009, when the economy was deep in the post-financial crisis recession.

Ahead of the official data release on Friday, both the Bank of England and City economists had expected zero economic growth in the April-June period, after a 0.5 per cent rise in GDP in the first quarter. 

The Office for National Statistics (ONS) said the economic contraction was driven by a plunge in manufacturing output. The ONS attributed the decline partly to lower car production as annual summer shutdowns for planned maintenance were brought forward to April in anticipation of the last Brexit deadline. 

However, expansion in the dominant services sector, which provided the only positive contribution to GDP growth, slowed to a crawl, at 0.1 per cent compared with the first quarter. 

“Contraction in the second quarter is a rude awakening after the growth in the first three months of the year,” said Tej Parikh, chief economist at the Institute of Directors.

“Companies have been running down stockpiles that were built up before the original March deadline for leaving the EU and have kept production at tentative levels. Many firms have had to keep investment and recruitment decisions on ice, as the prospect of a disorderly Brexit becomes increasingly real.”

Spending by all-important consumers – so far relatively resilient to Brexit jitters – slowed, rising only 0.5 per cent. Business investment, key to improvements in productivity and living standards, dropped by the same amount.

In June alone, the economy flatlined after expanding slightly in May.

The pound briefly fell below $1.21 against the dollar in the moments after the GDP announcement before regaining some ground to trade down 0.3 per cent on the day at $1.211.

Against the euro the pound was also 0.3 per cent down at €1.081, close to a two-year low.

A separate ONS release revealed a narrowing in Britain’s trade deficit in the second quarter, due largely to a big fall in goods imports after a sharp rise early in the year. Exports, both of goods and services, also declined, pointing to little support from the pound’s depreciation this year.

“The possibility of a recession – defined as two consecutive quarters where the economy shrinks – is now very real,” said Mike Jakeman, senior economist at PwC. 

He added that two major factors weighed on the economy: Brexit-related uncertainty and a weakening global economy.

“The fact that both of these problems have continued, or even worsened, so far in the third quarter leaves the UK economy on a knife-edge ahead of the government’s planned Brexit date of 31 October,” he said.

Thomas Pugh, UK economist at Capital Economics, agreed that the risk of recession has risen.  

“However, almost all the weakness was due to the drag from ‘net’ stock building and trade. And we expect growth to rebound in the third quarter, so the UK should avoid a recession…unless there’s a no-deal Brexit.”

Additional reporting by Ben Chapman