Though it wasn't entirely unexpected, the UK economy contracted in Q2 for the first time in seven years as the cloud of uncertainty brought on by the kingdom's looming exit from the European Union discouraged business investment and prompted some consumers to put off major purchases as well.
For the three months ended June, GDP contracted 0.2% compared to the previous quarter, according to the Office for National Statistics. That's lower than what experts had expected (they had forecast growth to be flat). The biggest drag was a drop in manufacturing output, which caused the production sector to shrink by 1.4%. Construction also weakened while critical service sector yielded no growth at all.
The contraction marks the first time the UK economy has shrunk since 2012.
The contraction comes amid rising fears that Britain could crash out of the European Union on Oct. 31 without a deal as negotiations with the EU remain at an impasse. Prime Minister Boris Johnson has committed to leaving on Oct 31. with or without a deal, causing the pound to weaken dramatically.
The UK's Office of Budget Responsibility has warned that a 'no deal' Brexit could cause GDP to contract by 2% by the end of 2020.
However the outlook wasn't all bad: Capital Economics sees GDP rebounding next quarter, and thereby avoiding a recession (defined as two quarters of contraction). And with many of the car factories that shut down around the original Brexit deadline expected to soon be starting up again, that could deliver a boost to growth.
The 0.2% q/q contraction in #GDP in Q2 was weaker than the stagnation most predicted. But almost all the weakness was due to the drag from “net” stock building. And car manufacturers will be working in August when they are normally closed. We expect GDP growth to pick up in Q3. pic.twitter.com/RsJzkPaclF— Capital Economics UK (@CapEconUK) August 9, 2019
Unsurprisingly, the pound has continued its slide on the news.
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