London: The UK economy shrank for the first time in more than six years in the second quarter, delivering a blow to newly installed Prime Minister Boris Johnson.
Gross domestic product fell 0.2 per cent following a solid 0.5 per cent advance in the previous three months, the Office for National Statistics said on Friday. Economists had expected output to be unchanged. In June alone, the economy stagnated. The pound fell after the report, sliding to $1.2117 as of 10:17am in London.
“Underlying momentum remains lukewarm, choked by a combination of slower global growth and Brexit uncertainty,” said Alpesh Paleja, lead economist at the Confederation of British Industry. “As a result, business sentiment is dire.”
The abrupt drop came as many firms ran down inventories built up ahead of the original March 29 deadline to leave the European Union. Stock levels fell by 4.4 billion pounds ($5.3 billion), knocking 2.15 percentage points off GDP.
The economy was also hit by auto factories bringing forward summer maintenance shutdowns to April to avoid the threat of supply disruptions around the original Brexit deadline.
Manufacturing, which enjoyed a bumper first quarter, shrank 2.3 per cent in the following three months, the most since 2009.
The GDP figures are the first since Johnson became premier last month, vowing to take Britain out of the EU on the new deadline of October 31, with or without a deal to cushion the blow.
Johnson is pledging a fiscal stimulus to help the economy cope with Brexit and a no-deal split could see the Bank of England cut interest rates, joining the international shift towards monetary easing. Investors are currently pricing in a 25-basis-point reduction in rates for January 2020.
While a modest recovery is forecast in the third quarter, the underlying pace of growth appears to be slowing in the face of heightened Brexit uncertainty and a world economy edging close toward its first recession in a decade. Another quarter of contraction would push Britain into a technical recession.
“The global backdrop is certainly the big drag in terms of growth at the moment, and Brexit uncertainty weighing on business investment,” said George Brown, an economist at Investec Bank Plc. “There’s certainly an element of inventory overhang,” but surveys suggest “underlying growth is a lot weaker.”