The basket case that is the British economy

UK economy shrinks by four times as much as predicted as Brexit paralysis takes hold

Car production slumped 24% as manufacturers shut down plants temporarily in anticipation of no-deal exit that did not happen

theIndependent,

10 June, 2019

The UK economy shrank 0.4 per cent in April as Brexit paralysis took hold following the proposed deadline for departure from the EU.

The latest monthly fall was four times larger than analysts had forecast and marked the second consecutive month of contraction for the UK’s economy after a 0.1 per cent drop in March.

Stockpiling of goods to deal with a disorderly Brexit on 29 March slowed down after deadline day was moved back to 31 October.

Gross domestic product (GDP) figures for the earlier months of this year had been boosted as manufacturers in particular built up supplies.

As that effect wore off, industrial production declined by 2.7 per cent in April compared to March while manufacturing slumped by 3.9 per cent – the sharpest drop since June 2002.

The ONS put the slump down to a “dramatic fall in car production” which was down 24 per cent. A number of car plants shut down in April as manufacturers prepared for a no-deal Brexit by bringing forward annual shutdowns which typically take place in the summer.

That effect is temporary but the slowdown in April was not limited to manufacturing. The construction sector also shrank by a more modest 0.4 per cent while services stagnated. Without car production shutdowns, GDP would have fallen 0.2 per cent in April.

However, monthly economic growth figures tend to be volatile and are prone to revision when more detailed data come in.

Underlying growth slowed to 0.3 per cent in the three months to April from 0.5 per cent in the three months to March. The services sector grew 0.2 per cent over the same period while construction was up 0.4 per cent.

The National Institute of Economic and Social Research (NIESR) said the UK is now on course for a “marked slowdown” in the second quarter of 2019. The economy is now expected to shrink by 0.2 per cent, NIESR said.

“The underlying picture is also quite weak, with Brexit-related uncertainty at home and trade tensions abroad dragging on investment spending and economic growth,” said Garry Young, head of macroeconomic modelling and forecasting at NIESR.

The pound weakened against the US dollar following the disappointing figures, dropping 0.4 per cent to $1.27.

The ONS’s head of GDP Rob Kent-Smith said: “GDP growth showed some weakening across the latest three months, with the economy shrinking in the month of April mainly due to a dramatic fall in car production, with uncertainty ahead of the UK’s original EU departure date leading to planned shutdowns.

“There was also widespread weakness across manufacturing in April, as the boost from the early completion of orders ahead of the UK’s original EU departure date has faded.”

Howard Archer, chief economic adviser to the EY Item Club, said it “looks like the economy continued to struggle in May – although there is likely to have been some rebound in car production as plants reopened”.

“April’s dip in GDP and apparent ongoing softness in May reinforces our belief that the economy is headed for a markedly weakened performance in the second quarter,” Mr Archer said.

“We had been expecting GDP growth to be no more than 0.2 per cent quarter on quarter in the second quarter but even this muted performance is now looking somewhat optimistic – as it is hampered by some unwinding of the major stockbuilding that occurred in the first quarter amid concerns of a disruptive Brexit occurring at the end of March.

“Prolonged Brexit uncertainties, a fraught UK political situation and a challenging global economic environment are also weighing on economic activity in the second quarter.”

Ruth Gregory, senior UK economist at Capital Economics, said the clear message is that underlying growth is “pretty sluggish”.

“With the Brexit paralysis and a slowing global economy taking its toll, we doubt GDP will grow by much more than 1.5 per cent or so in 2019 as a whole and expect interest rates to remain on hold until the middle of next year.”