The UK Economy

According to new data released by the Office for National Statistics, the UK economy has shrunk for the first time since 2012. The unexpected decline of 0.2% comes amid news of Brexit stockpiling in anticipation of shortages and shutdowns in the autumn.

The pound sank as a result of the gloomy forecast, bringing fears of a recession. Sterling fell to $1.2025 against the dollar and to €1.0736 against the euro – a dip of 0.75%. This was its lowest level since the global financial crisis a decade ago. In addition, manufacturing output has fallen and the construction sector has weakened.

British Pound

© Jax10289 / Adobe Stock

 

Why has the economy declined?

When the economy declines in two consecutive quarters, a recession occurs. This is the first time there has been a decline since the fourth quarter of 2012. It has come as a shock to economists, who had not forecast a decline, although they had expected it to remain stagnant, with 0% growth.

In the first quarter, there was a 0.5% growth, although this was as a result of manufacturers and retailers stockpiling ahead of Britain’s departure from the EU on 31st October, in case of a no-deal Brexit. As a result, the manufacturing sector recorded its biggest quarterly growth since the 1980s.

The Office for National Statistics says the economy has been “particularly volatile” this year due to the original Brexit date of 29th March, which sparked changes in activity, even though it was eventually postponed.

 

Manufacturers’ stockpiling

Manufacturers in the UK have been stockpiling goods at a high rate, causing stocks to increase significantly, according to research by IHS Markit/CIPS. This has caused manufacturing growth to reach its highest level in 13 months.

There has been a trend for increases that has continued for 32 months – significantly, since the British public voted to leave the EU in the referendum of 23rd June 2016. However, market analysts say the artificial boost is now coming crashing down as the threat of a no-deal Brexit looms ever closer.

Companies in the EU are starting to source goods away from UK firms to avoid the expected chaos after 31st October. If the UK leaves the EU with no trade deal in place, a long period of uncertainty will have a detrimental effect on the manufacturing sector.

 

How is Europe’s economy?

Compared to other European economies, the pound is particularly weak, adding to the general economic woes for Britain on top of the no-deal Brexit fears. Although economic growth across Europe has slowed down, it has not gone into a significant decline in the same way that the UK economy has.

In France, in the past quarter, the economy grew by 0.2%, while it grew by 0.5% in Spain. It remained stagnant in Italy and declined by 0.1% in Germany.

Economists say that if the UK does leave without a trade deal in place, the pound will remain weak for “several years” after Brexit, until the country readjusts.

 

Analysts’ forecasts

The Bank of England has not indicated that it is expecting a recession. However, Shadow Chancellor John McDonnell doesn’t share this optimism and has described Britain’s current economic figures as “dismal”.

The Federation of Small Businesses has called for an emergency Budget to allay industry fears of a no-deal Brexit. Business leaders say, “time is of the essence”, urging the chancellor to step in with “radical action” immediately to avoid a “chaotic” autumn.

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