U.K. Economy Loses Steam as Battle Over Brexit Rages

(Bloomberg) -- The U.K. economy lost momentum in the three months through October, a further sign of the toll being taken by Brexit uncertainty.

Growth slowed to 0.4 percent from 0.6 percent in the third quarter, the Office for National Statistics said Monday. In October alone, growth was just 0.1 percent, with the economy being spared a third month of stagnation by a rebound in the dominant services industry.

U.K. Economy Loses Steam as Battle Over Brexit Rages

Key Insights

  • A heatwave-induced surge in the early summer proved short lived. Fears about a no-deal Brexit are weighing on confidence in the final quarter, as shown by recent purchasing-management surveys.
  • Growth slowed across all key sectors of the economy from the quarter though September. Annualized growth was 1.4 percent.
  • The figures come a day before a crucial vote in Parliament. Lawmakers are expected to reject the deal Prime Minister Theresa May negotiated with the European Union, potentially putting Britain on a path out of bloc with no deal on March 29.
  • Markets see the Bank of England refraining from interest-rate increases for another year at least. But the inflation shock from a chaotic Brexit may make it hard to loosen monetary policy to aid the economy, as officials did after the 2016 referendum.
  • Despite the fall in the pound since the referendum, the contribution to growth from trade has been disappointing. In October, the deficit in goods widened.
  • Revisions to the third quarter showed the deficit in goods and services widening to 9.8 billion pounds, wiping out any contribution from trade to growth. The deficit was previously estimated to have narrowed sharply to 2.9 billion pounds.

Get More

  • Manufacturing shrank 0.9 percent in October, with eight of 13 sectors posting declines. Motor vehicle output fell 6.6 percent amid demand-induced shutdowns. Overall industrial production fell 0.6 percent and the annual decline of 0.8 percent was the most since 2016.
  • Services gained 0.2 percent, the first increase since July, boosted by accountancy and audit and software programming. Motor trades, which were hit by new EU emissions standards in September, also rose as activity was displaced to October. Construction shrank 0.2 percent.
  • Imports rose 3.5 percent, but the ONS says import growth is no higher than the 12-month average, suggesting there is little evidence in the trade figures of companies stockpiling in anticipation of a chaotic Brexit.

What Our Economists Say...

“A degree of cooling was always likely as a number of temporary factors that supported the economy over the summer waned. Brexit uncertainty is almost certainly acting as a brake on activity, too. We continue to forecast the economy will expand by 0.4 percent this quarter, though the risks are tilted to the downside.”

-Dan Hanson, Jamie Murray, Bloomberg Economics. Read the full REACT

©2018 Bloomberg L.P.