UK economy suffers shock pre-Brexit contraction in Q2, first since 2012

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Britain's economy shrank for the first time since 2012 in the second quarter, a severe hangover from a pre-Brexit stockpiling boost in early 2019 and one that bodes poorly as Prime Minister Boris Johnson gears up to leave the EU in October.

Sterling fell and British stocks sold off after data showed output in the world’s number five economy fell at a quarterly rate of 0.2 percent in the three months to June, below all forecasts in a Reuters poll of economists that had pointed to a flat reading.

With Johnson’s government committed to leaving the European Union on Oct. 31, regardless of whether he can secure a transition deal to avoid trade disruption, the outlook for the remainder of 2019 is uncertain.

The world economy has also slowed due largely to a trade dispute between the United States and China.

Year-on-year economic growth slid to 1.2 percent from 1.8 percent in the first quarter, Britain's Office for National Statistics said, its weakest since the start of 2018.

“There is ... little doubt that the economy is stalling, regardless of the volatility in the data,” PwC senior economist Mike Jakeman said.

He said the Brexit crisis and the uncertain global outlook left Britain's economy on a “knife-edge” for the third quarter.

Annual growth in June alone was the weakest since August 2013 at one percent.

Dovish data

The Bank of England last week predicted that growth will only stage a limited pick-up to a quarterly rate of 0.3 percent during the current quarter, and that growth for the year as a whole will drop to 1.3 percent.

It also warned of a one-in-three chance that output in annual terms will contract in the coming quarters.

“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,” Chris Williamson, chief business economist at IHS Markit, said.

Previous data had shown a collapse in factory output in April as car manufacturers brought forward their annual summer shutdowns to follow the original March 29 Brexit deadline that was postponed to Oct. 31.

But June manufacturing data was also unexpectedly poor and output for the quarter contracted at the fastest rate since early 2009, when Britain was mired in recession.

Private-sector business surveys have shown the manufacturing and construction sectors both contracted in July, while the larger services sector eked out only modest growth.

Britain's economy has slowed since June 2016's vote to leave the EU, with annual growth rates dropping from more than two percent before the referendum to expand by 1.4 percent last year.

Friday's data showed business investment contracted 0.5 percent in the second quarter of the year versus economists' expectations of a 0.3 percent fall.

Household spending, which has been much more resilient than business investment, due to falling unemployment and rising wages, rose 0.5 percent on the quarter.

Trade figures and its contribution to GDP were distorted erratic flows of non-monetary gold and also showed the effect of businesses building up fewer stocks than in the first quarter of the year when they were readying for Brexit.