U.K. Recession Threat Recedes as Economy Posts Solid July Growth

(Bloomberg) --

The U.K. economy grew at its fastest pace in six months in July, an unexpectedly strong performance that will allay fears Britain is facing a possible pre-Brexit recession.

The economy recorded growth across the board, with the dominant services sector enjoying its best month this year. All else being equal, it will expand 0.4% in the third quarter even if output is unchanged in August and September, avoiding a second straight quarter of contraction.

However, there is evidence that the economy lost some momentum more recently as the political crisis over Brexit hit confidence and the trade war between the U.S. and China escalated.

In a report on Monday, KPMG warned that leaving the European Union without a deal could trigger a recession lasting four quarters, with output contracting by 1.5% next year. The Resolution Foundation said the next recession could be “unnecessarily painful” because monetary and fiscal policy are ill-equipped to combat it.

What Bloomberg’s Economists Say...

“Today’s data show the U.K. economy expanded strongly in July and we expect the data to show a further gain in August. The bigger risk is the economy enters a slump later this year -- a no-deal Brexit remains a real possibility and the economy is carrying only weak underlying momentum.”

--Jamie Rush, chief European economist
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Opponents of a no-deal Brexit are battling to stop Prime Minister Boris Johnson taking Britain out of the European Union next month without a transition agreement to cushion the blow.

The turmoil has seen Johnson, who has staked his weeks-old premiership on delivering Brexit on Oct. 31, defeated in parliamentary votes, lose his majority, suffer Cabinet resignations and fail in his bid to hold a general election.

The pound strengthened following Monday’s data, which showed GDP expanded 0.3% in July, beating forecasts for a 0.1% increase, and was unchanged over the latest three months. The economy will avoid a recession unless output drops by more than 0.8% over August and September.

Construction output rose 0.5% between July and June; manufacturing grew 0.3% despite a stagnant month for auto output; and total industrial production gained 0.1%.

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