UK economy shrinks for first time since 2012

The British economy unexpectedly shrank in the second quarter for the first time since 2012 as Brexit uncertainties heaped pressure on firms, official figures showed Friday.

The decline is set to raise alarm that the economy could experience its first recession in a decade. Traders in currency markets appeared to reflect that concern, sending the pound down across the board, including to another two-and-a-half year low against the US dollar of US$1.2065.

The drop illustrates the market disappointment to the quarterly contraction, which lowered the annual growth rate to 1.2 per cent from 1.8 per cent in the first quarter. Most analysts expected the economy to flatline.

In seeking to explain the fall in the April-June period, the Office for National Statistics noted that there was “increased volatility around the United Kingdom’s (UK) original planned exit date from the European Union (EU) in late March.”

Brexit was meant to happen on March 29 but was delayed to the end of October after Parliament rejected the withdrawal agreement that the previous prime minister, Theresa May, had negotiated with the EU.

Before the extension was granted, many firms used up warehouse space to help them cushion the likely disruption from Britain crashing out of the EU on March 29 without a deal. That stockpiling boon helped the economy grow by 0.5 per cent in the first quarter. When the extension was granted, there was less need for firms to stockpile.

The run-up to the original Brexit date also prompted many car companies to bring forward their annual maintenance shutdowns to April as they concluded that the early weeks of a no-deal Brexit would be the most disruptive.

The combination of these Brexit-related developments led to a sharp 1.4 per cent quarterly decline in the output of production industries.

The fact that the overall economy performed worse than anticipated is likely to increase concern about Brexit’s corrosive effect on the economy. Business investment, which has been historically weak since the country voted in June 2016 to leave the EU, weakened further in the second quarter, contracting by 0.5 per cent.

“Brexit uncertainty, and to a lesser extent, weaker global demand, has reduced firms’ appetites to expand,” said James Smith, an economist at ING bank. “Meanwhile, contingency planning activities for a no-deal Brexit are costly and often resource-intensive, reducing scope to lift capital spending.”

AP