UK economy shrinks 0.2% in Q2, recession fears sparked
The UK economy unexpectedly contracted in the second quarter, according to figures released by the Office for National Statistics on Friday, sparking fears of a recession.
Gross domestic product contracted 0.2% quarter-on-quarter compared to 0.5% growth in the first quarter, which was boosted by Brexit stockpiling. This undershot expectations of no growth and marked the worst performance since 2012.
On the year, GDP grew 1.2% in the second quarter, down from 1.8% growth and missing expectations of a 1.4% increase.
Rob Kent Smith, head of GDP at the ONS, said: "GDP contracted in the second quarter for the first time since 2012 after robust growth in the first quarter. Manufacturing output fell back after a strong start to the year, with production brought forward ahead of the UK’s original departure date from the EU.
"The construction sector also weakened after a buoyant beginning to the year, while the often-dominant service sector delivered virtually no growth at all.
"The trade deficit narrowed markedly, as imports fell following a sharp rise in the first quarter ahead of the UK’s original departure date from the EU."
Sterling slipped on the news, trading down 0.2% against the dollar at 1.2109 and 0.3% versus the euro at 1.0818.
Chris Williamson, chief business economist at IHS Markit, said the figures confirm that the strong start to the year was merely an illusion of well-being, with first quarter growth having been buoyed by Brexit-related stockpiling.
"Such inventory building moved into reverse in the second quarter, hitting manufacturing hard, accompanied by sharply deteriorating demand for construction projects and a weakening service sector," he said.
“Given the backdrop of slower global economic growth and heightened Brexit uncertainty, the UK economy looks set to struggle in coming months. There’s a chance that we could see growth lift higher amid no-deal Brexit planning as we head towards October 31, but the headwinds in the wider economic environment mean any such boost is likely to prove all too brief."
David Cheetham, chief market analyst at XTB, said: "This marks the first time in over six years that we’ve had a quarterly contraction in economic activity and given the growing threat of a no-deal Brexit that looms menacingly overhead, it would not be at all surprising if the current quarter also shows a contraction - therefore meeting the standard definition of a recession with consecutive drops in quarterly GDP."
Oanda analyst Craig Erlam said: "Heading into a no-deal Brexit in recession would be a nightmare scenario for Boris Johnson's team and could further drag on the pound at a time when it is already in free-fall.
"The reaction to the data wasn't particularly positive either, with the pound now testing its recent lows and eyeing 1.20 against the dollar. Brexiteers may struggle to blame project fear as the PR battle with the People's Vote campaign heats up so we can probably expect plenty of finger-pointing at how badly Europe is performing and how the global slowdown is to blame."