Recession fears as UK economy unexpectedly shrinks

The UK economy unexpectedly shrank for the first time in seven years in the second quarter of this year.

Official figures reveal GDP fell by 0.2% between April and June, prompting fears of a recession as Britain edges closer to Brexit in October.

The new Office for National Statistics (ONS) data show the first quarterly decline since 2012, surprising many economists and sending the pound downwards.

UK chancellor Sajid Javid blamed a slowdown in global growth, which is hurting UK exports and business confidence but Brexit uncertainty is also widely seen as a drag on the UK economy.

Many analysts had only expected Britain’s output to flatline at 0% in the second quarter, but several industry surveys in recent months had pointed to contraction and painted a bleak picture of the health of the economy.

The latest numbers compare to growth of 0.5% in the first quarter of 2019, boosted by widespread stockpiling by firms in the run-up to Britain’s previous 31 March deadline for leaving the EU.

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The ONS highlighted a sharp decline in production output as manufacturing suffered a 1.5% fall in its biggest quarterly drop since the financial crisis more than a decade ago. Manufacturing in the transport, chemicals and basic metals sectors suffered the biggest declines.

Figures also showed a slowdown in the UK’s dominant services sector with growth of just 0.1%, its weakest rate in three years.

It has already sparked fears that the UK could be set for a recession, two quarters in a row of decline, as the prospect of a no-deal Brexit in October batters the economy.

Labour’s shadow chancellor John McDonnell said the “dismal” figures were a “direct result of Tory incompetence,” blaming the government’s handling of Brexit and years of austerity cuts for falling business investment and stagnating productivity.

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Neil Wilson, chief markets analyst at Markets.com, noted before the latest figures that the Bank of England had recently lowered its estimates for growth for this yaer and next.

He also highlighted grim recent figures on the state of UK manufacturing, which saw the worst decline in business conditions for six years in June.

Manufacturing and construction appear to be among the hardest hit already by enormous economic uncertainty over Britain’s future relationship with Europe and fears of a catastrophic divorce without a deal.

Surveys and research also suggest levels of investment and business confidence have plummeted across the wider economy.

The car industry, which is warning of an existential crisis in a no-deal scenario, saw output slide by more than a fifth in the first half of the year, according to industry body the SMMT. Investment also nosedived by more than 70%.

David Cheetham, chief market analyst at Xtb, said: “This marks the first time in over 6 years that we’ve had a quarterly contraction in economic activity and given the growing threat of a no-deal Brexit that looms menacingly overhead, it would not be at all surprising if the current quarter also shows a contraction - therefore meeting the standard definition of a recession with consecutive drops in quarterly GDP.”

Javid, who replaced Philip Hammond at the Treasury last month, said: “This is a challenging period across the global economy, with growth slowing in many countries. But the fundamentals of the British economy are strong – wages are growing, employment is at a record high and we’re forecast to grow faster than Germany, Italy and Japan this year.”

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