The UK’s economic condition

19-08-2019

It is clear that the latest data coming out of the UK has revealed an economy in decline as headwinds from slower global economic growth are aggravated by Brexit.

The Bank of England has retained its tightening bias, but any continued economic weakness will mean policymakers are likely to take an increasingly dovish stance.

Official GDP data showed the economy contracted for the first time since 2012 in the second quarter, and survey data for July provide slight hope for anything better than stagnation in the third quarter.

In the second quarter, GDP experienced a 0.2% decline unlike the 0.5% growth in the first quarter of the year. The Brexit dilemma hit manufacturing, and was accompanied by sharply deteriorating demand for construction projects and a weakening service sector.

Looking in more detail, the GDP data from the Office for National Statistics showed manufacturing output running 2.3% below the first quarter, dropping at the sharpest rate since the height of the global financial crisis in 2009, while construction output was down 1.3%. The service sector continued to support the economy, but output was up just 0.1% on the first quarter.

The main source of growth appears to be households as spending rose 0.5%, with consumers benefiting from low-interest rates and a strong job market, for now. Recent data from recruitment agencies reported that the number of people placed in new jobs fell for a fifth straight month in July, and that wage growth slowed to the weakest for over two years.

Perhaps of greatest concern is the decline in business investment, which fell 0.5% in the second quarter and indicates that companies are reluctant to inject money into expansion and new product development amid the ongoing uncertain economic and political climate. The longer the investment decline persists, the deeper the damage done to the UK's longer-term growth potential.

The slight drop in GDP had been signalled in advance by the PMI surveys, which have since indicated that the economy remained in the doldrums in July. Although the all-sector PMI rose slightly in July, the reading was consistent with flat GDP.

While companies responding to the surveys often reported Brexit-related uncertainty to have curbed sales and deterred investment, the roots of the problems are not all home-grown. Slower international economic growth has clearly also had an increasing impact in recent months.

Global survey data has signalled the weakest pace of worldwide economic growth for three years in recent months, led lower by manufacturing turning down at the sharpest rate since 2012 as trade war worries were intensified.

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 the end of October, but the headwinds in the wider economic environment mean any such boost is likely to prove all too brief.

Source: Times of Malta