Brexit: UK economy may be shrinking on back of no-deal fears

The UK economy has suffered its first quarterly contraction in seven years, a closely watched survey suggests, as the looming threat of a no-deal Brexit paralyses business activity.

Growth in the UK’s dominant services sector came to a near standstill in June, confirming a gloomy outlook for a month in which the manufacturing and construction industries plunged into reverse.

The figures indicate that the British economy contracted by about 0.1% in the three months to June, according to IHS Markit and the Chartered Institute of Procurement and Supply (Cips), which compiles the monthly survey.

Sounding alarm bells over the health of the economy before Britain is scheduled to leave the EU by 31 October, failure to rebound in the third quarter would mean the country sliding into a recession before Brexit.

The last time GDP shrank for one quarter was in the final three months of 2012. Two consecutive negative quarters constitute a recession.

Chris Williamson, the chief business economist at IHS Markit, said the June performance in the service sector was one of the worst over the past decade and the slowdown could drag into a third quarter.

“Brexit-related uncertainty has increasingly exacerbated the impact of a broader global economic slowdown. Risks also remain skewed to the downside as sentiment about the year ahead is worryingly subdued, suggesting the third quarter could see businesses continue to struggle,” he said.

The latest snapshot revealed subdued activity in the sector forming the backbone of the British economy, which includes finance, transport and telecommunications, in a survey of 650 services firms that is closely monitored by the Treasury and the Bank of England. The service sector accounts for about four-fifths of the UK economy.

It comes after Threadneedle Street warned that a temporary boost to the economy from stockpiling in the run-up to the original 29 March Brexit deadline – when companies rushed to make goods and buy raw materials – was beginning to fade, just as economic growth around the world slows. The Bank recently forecast zero growth in the second quarter.

Expectations among City investors have increasingly shifted towards an interest rate cut from the Bank as the growth picture deteriorates. The reading from the PMI sent financial market expectations of an interest rate cut this year to more than 50%.

Official growth figures for the second quarter will be released next month. However, the respected National Institute of Economic and Social Research (NIESR) thinktank has forecast that GDP contracted by 0.2% in the second quarter.

Garry Young, director of macroeconomic modelling and forecasting at NIESR, said there was a 40% chance of a recession in the middle of the year. “You’ve got one quarter of contraction, so you’re already halfway there,” he said.

Now that companies either have adequate stockpiles or can run down their existing supplies, activity in the UK economy is expected to slow. Economic activity around the world is also slowing, while fears in Britain are mounting over the impact of a no-deal Brexit.

The IHS Markit/Cips services purchasing managers’ index (PMI) dropped to 50.2 last month from 51.0 in May, below the forecasts of City economists and only slightly higher than the 50.0 mark that separates economic growth from contraction.

After the manufacturing and construction sectors plunged into contraction, the PMI for all sectors of the economy dropped below 50 for the first time since immediately after the Brexit vote in July 2016, falling to 49.2 in June from 50.7 in May.

Factory output dropped at the quickest rate since October 2012, while the decline in activity in Britain’s beleaguered construction industry was even sharper, falling the most since the depths of the last recession in April 2009.

Economic growth has slowed around the world in recent months amid tensions between the US and China over trade, which has served as a brake on imports and exports around the world.

Elsewhere, factory output has plunged into reverse in Germany, Italy, Spain and several other eurozone economies. Mark Carney, the Bank of England governor, warned this week that trade wars could “shipwreck” the world economy.

Andrew Wishart, UK economist at the consultancy Capital Economics, said weaker growth was expected after firms ramped up activity at the start of 2019 to avoid no-deal Brexit disruption.

“The economy clearly lost momentum in the second quarter. That was always going to be the case after the pre-Brexit boost in the first quarter. But we are getting more worried that the underlying trend has weakened, too,” he said.

Source: theguardian