Snapshot - Market News

Will the UK economy slip into recession?

Disappointing GDP data shows the UK economy contracted in the second quarter and raises the risk of the country entering a technical recession.

09/08/2019

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

Schroders

The UK economy contracted by 0.2% in the second quarter, following 0.5% growth at the start of the year.

What was behind the data?

A sharp drop in manufacturing output (-2.3%) over the quarter was the main driver of the decline, although the construction sector also contracted (-1.3%). The service sector managed to eke out 0.1% growth, though this was a three year low.

Within the expenditure breakdown, the biggest drag on growth over the quarter was a reduction in inventories which had been building for some quarters ahead of the initial March 2019 Brexit deadline. With the deadline now at the end of October, private and public institutions and individuals probably reduced their holdings of goods and materials etc.

Otherwise, household spending slowed compared to the previous three months, but remained robust, growing by 0.5% over the quarter. Total investment growth is contracting once again, while government spending remained elevated. The trade balance returned to a more normal level after a big distortion was caused by the potential import of non-monetary gold (by private individuals). This was the main cause of the record negative contribution from trade in the first quarter, and the strong positive contribution this quarter.

Is a recession looming?

Overall, these are clearly a disappointing set of figures which have significantly raised the likelihood of a technical recession – two consecutive quarter of negative growth.

Given the large destocking that has just occurred, we are unlikely to see a repeat in the third quarter. If anything, we will probably see another, even larger build-up of inventories in the run-up to October, especially as the government’s default strategy is to exit the EU without a deal if one cannot be reached. Restocking will probably be enough to avoid a recession for now, but the risks further out are building.

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