ADVERTISEMENT

Missed Brexit Deadline Creates Volatile Quarter for U.K. Economy

Missed Brexit Deadline Creates Volatile Quarter for U.K. Economy

(Bloomberg) -- Go inside the global economy with Stephanie Flanders in her new podcast, Stephanomics. Subscribe via Pocket Cast or iTunes.

The U.K. economy experienced major distortions in the second quarter after firms stockpiled goods in the run-up to the original March 29 Brexit deadline, figures published Monday show.

The Office for National Statistics confirmed the economy shrank 0.2% between April and June as companies offloaded products piled up in warehouses. It was the first quarterly contraction for seven years.

Missed Brexit Deadline Creates Volatile Quarter for U.K. Economy

Britain also saw its current-account deficit cut by a quarter. Imports, which surged in the first quarter as firms accumulated foreign-made components to guard against the possibility of trade disruptions, sank to their lowest level for more than a year.

With Britain now due to leave the European Union on Oct. 31, there is evidence that stockpiling resumed to some extent in the third quarter. A return to growth is forecast, averting a pre-Brexit recession, but economists say a slump is likely next year if Britain crashes out of the European without a deal to soften the blow.

Bank of England policy maker Michael Saunders said last week that even if the U.K. avoids a no-deal break, prolonged uncertainty could damage the economy enough to require rate cuts.

Key Insights

  • Change in inventories cuts GDP by 1.9 percentage points, slightly less than the 2.1 points previously estimated. This all-but offsets boost of 2.6 points from a sharply reduced trade deficit
  • Stocks excluding the alignment adjustment fell 2.7 billion pounds
  • Brexit-related factory closures hit auto output, a pattern which could be repeated in November. Manufacturing fell 2.8%, the biggest decline since 2009. Services grew just 0.1%, the least for three years
  • The current-account deficit -- the gap between money leaving the U.K. and money coming in -- narrowed to 25.2 billion pounds, or 4.6% of GDP
  • Imports of goods and services fell by 11.2%, with unspecified goods, which includes non- monetary gold, accounted for a significant chunk of the decrease. Exports fell 5.9%, reflecting weaker global growth
  • However, the current-account deficit was larger than forecast. This was due to the shortfall on investment income, which widened sharply to 6.6 billion pounds amid higher FDI payments to foreign investors
  • Business investment fell 0.4% but the economy got support from government spending and households, with a 0.4% rise in consumer spending reflecting real wage growth
  • Government spending rose 1.1%, largely reflecting increased spending in the National Health Service as austerity eases. State spending rose 4% from a year earlier, the most since 2008
  • GDP rose 1.3% from a year earlier, revised from 1.2%

Get More

  • With pay growth now easily outstripping inflation, real disposable income rose 0.7%
  • Households saved more of their income as a result, with the saving ratio rising to 6.8% First quarter revised up to 6.4% from 4.1%, suggesting households are in a better position to weather Brexit turbulence than previously thought
  • Sweeping revisions mean households have been net lenders over the past two years, as they spent and invested less than they received. They were previously estimated to be net borrowers
  • The ONS said people have been donating less to charity than previously thought and receiving more money from renting their homes
  • Changes to the accounting treatment of student loans also mean less money is being lent to households by the government
  • There were small upward revisions to quarterly GDP growth in recent quarters. Economy grew 0.6% in first quarter, rather than 0.5%

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson

©2019 Bloomberg L.P.