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Recession threat hangs over UK economy ahead of Brexit

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Boris Johnson arrived in Downing Street last month intent on putting “rocket boosters” under the economy. But after the dismal growth figures released on Friday, the prime minister may count himself lucky if the UK manages to avoid falling into a recession by October 31, when he insists the UK will leave the EU.

A second quarter contraction of 0.2 per cent in GDP reflected a weaker than expected performance in almost every part of the UK economy, with a sharp fall in manufacturing and construction output, a renewed slump in business investment and barely positive growth in the all-important services sector.

Much of this was because of swings in inventories and net trade, as companies ran down stockpiles they had built in the run-up to the original March Brexit deadline. But the underlying growth rate has also slowed — reflecting the global downturn in manufacturing, and businesses’ fears that the risks of a no deal Brexit are rising.

“It’s not just problems at home, it’s problems abroad as well,” said Kallum Pickering, economist at Berenberg, adding that growth was likely to remain well below trend in the second half of the year.

Sajid Javid, the UK chancellor, attempted to put a positive spin on the data, arguing that forecasters still expected the UK to grow faster than Germany, Italy and Japan.

But these countries are among the world’s worst performing major economies. Export-focused Germany and Italy are especially exposed to the global slowdown in trade and Japan suffers from endemically low growth. The IMF expects the UK to grow at half the rate of the US and no better than the eurozone average over 2019.

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John McDonnell, shadow chancellor, on Friday said the figures were “a direct result of Tory incompetence”, and warned that “Brexit bungling” was “breaking the economy”.

Most forecasters expect UK growth to pick up in the near term — with Britain escaping a recession on the technical definition of a contraction in two consecutive quarters.

“The UK should avoid a recession . . . unless there’s a no deal Brexit,” said Thomas Pugh, at the consultancy Capital Economics.

This is partly because manufacturing output should recover — with some companies starting to rebuild stockpiles ahead of the October Brexit deadline, and car factories remaining open throughout August, after having brought forward their annual shutdowns as part of March Brexit planning.

However, the near-stagnation in the services sector — the mainstay of the UK economy — is a significant setback. Economists also noted the lack of momentum at the end of the quarter. GDP was stagnant in June, offering “a poor launch pad for growth in the second quarter,” according to Martin Beck, at the consultancy Oxford Economics.

The one bright spot in the UK economy is the continued strength of consumer spending. Economists believe consumption will continue to support growth over the next few months, provided there is no sudden shock to the labour market. Household finances are in good shape, thanks to high employment and a recent pick-up in wage growth, and as George Brown, economist at asset manager Investec, noted, consumers do not seem to share businesses’ angst over the risks of a disorderly Brexit.

Friday’s data suggests the government also supporting growth: its spending was up 0.7 per cent quarter on quarter and has been rising since the end of 2018. Mr Pickering said this could reflect increases in public sector pay and spending on Brexit preparations — but added that it was possible, even without holding a budget, “to do a lot of fiscal stimulus just by asking departments to overspend”.

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Mr Javid is spending the summer planning a fresh injection of public money. He has promised to announce a one-year spending settlement for government departments next month, including new money for schools and policing. On Friday, he also said he would announce plans for a “step change” in infrastructure investment in the autumn.

However, the overall picture remains one of a flagging economy, where businesses are reluctant to invest and continued growth relies on consumers.

Matt Whittaker, deputy chief executive of the Resolution Foundation, said persistent Brexit uncertainty and global weakness “doesn’t necessarily mean we’re heading for recession” but that the risk was certainly heightened — and many lower income households were not equipped to cope with a new downturn.

The Bank of England cut its outlook for UK growth earlier this month, predicting an expansion of 1.3 per cent this year and next — assuming a smooth Brexit. But even on this basis its forecasts showed a one in three chance of the economy shrinking at the start of 2020. Mark Carney, BoE governor, made it clear that a no-deal Brexit would lead to job losses and a spike in inflation, hitting real incomes.

“The outlook for the UK economy remains very fragile in the short term, with the odds of a technical recession relatively high,” said Yael Selfin, economist at KPMG.

Via Financial Times

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