Stockholm (Ekonamik) – The UK’s real GDP fell by 0.2% on a quarter-on-quarter basis in the second quarter of 2019 according to the Office for National Statistics (ONS), the UK’s statistical agency. This is the first time that the economic aggregate has fallen since the fourth quarter of 2012. Compared to the same quarter in 2018, GDP grew by 1.2%, down from 1.8% in the first quarter of the year.
The ONS made some interesting remarks regarding the GDP figures, most of which pertain to Brexit and how people and companies in the UK are adjusting to it.
“The path of GDP and some of its components has been particularly volatile through the year so far, largely reflecting changes in timing of activity related to the UK’s original planned exit date from the European Union in late-March,” the statistical agency explained.
Looking at the various components of GDP on an expenditure basis shows that the main contributor to the GDP fall was investment, with Gross Capital Formation (GCF) falling by 4.01%. This item had been the main driver of growth in the first quarter of the year
“There is evidence that stockpiling was taking place in the first quarter of the year, which provided a boost to GDP, with the latest figures showing that these increased stock levels were partly run down in Quarter 2 2019,” added the ONS press release. “Furthermore, it was also reported that a number of car manufacturers had brought forward their annual shutdowns to April as part of contingency planning.”
The ONS also noted a large amount of volatility in the balance of trade, which had fallen by 2.99% in the previous quarter, only to increase by 3.5% this time around. Although the ONS did not say so, this rise is consistent with UK exporters front-loading their sales and invoicing ahead of the October 31st deadline.
On a sectoral basis, services grew by 0.08%, down from 0.3% in Q1. Construction contracted by 0.08%, but the main driver of the fall in GDP seems to have come from the production sector (-0.2%), particularly manufacturing, which fell by 1.75%. The ONS’s observation about the automotive industry as well as the concerns of many analysts about the effects of Brexit on car factories seems to be vindicated by more granular manufacturing data, which shows a 5.2% fall in the manufacture of transport equipment. The two other top manufacturing industries affected were the manufacture of chemicals and chemical products (-6.2%) and the manufacture of coke and petroleum products (-6.5%).
An Unwel
The figures came as a surprise to the Bank of England (BoE), which based on the forecasts of its August Inflation Report argued that “after growing by 0.5% in 2019 Q1, GDP increased by 0.3% in the three months to May and is expected to have been flat in Q2 as a whole.” The central bank agreed with the ONS about volatility, noting that “UK GDP data have been volatile in 2019, largely because of Brexit-related effects.”
“Overall, these are clearly a disappointing set of figures which have significantly raised the likelihood of a technical recession – two consecutive quarters of negative growth”, said Azad Zangana, Senior European Economist and Strategist at Schroders. “Given the large destocking that has just occurred, we are unlikely to see a repeat in the third quarter. If anything, we will probably see another, even larger build-up of inventories in the run-up to October, especially as the government’s default strategy is to exit the EU without a deal if one cannot be reached. Restocking will probably be enough to avoid a recession for now, but the risks further out are building.”
Zangana puts the finger on the wound. The future of the UK’s GDP seems to stand on the balance of the effect of a forthcoming Brexit on the balance of trade and investment. With the Johnson cabinet seemingly bent on leaving the EU on October 31st, what would you do if you were a company? Would you continue to frontload your sales and invoicing? Would you make some last dash at stockpiling inventories? Arguably, it is likely that whatever drove the decisions that defined economic activity in the second quarter will also be true in the next one. At that stage, the ball will move to the BoE’s court.
“The likelihood of a hard Brexit seems to have increased substantially lately, and Johnson’s administration currently expresses confidence it can deliver Brexit on October 31. We believe the Brexit uncertainty will stay elevated ahead, weighing on the UK economy in addition to global risks.,” commented Kari Due-Andresen Chief Economist for Norway at Handelsbanken Capital Markets. “The Bank of England will likely keep its policy unchanged while it waits for Brexit. If the Brexit deadline were to be extended, we believe the BoE would continue to keep monetary policy unchanged. However, in the case of a no-deal Brexit, we believe the BoE would cut the policy rate.”
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