The UK economy shrank in the second quarter of 2019, raising fears of a recession and representing the UK’s worst quarterly performance since 2012.
Data from the Office for National Statistics (ONS) showed that output fell by 0.2% between April and June, down from growth of 0.5% in the previous quarter, when stockpiling ahead of the original Brexit deadline boosted growth. Although the key services sector expanded, the growth was more than offset by a 1.4% fall in manufacturing output. The result was worse than forecast by the Bank of England, which was expecting zero growth in the second quarter. The pound tumbled by 0.4% against the dollar on the news, and is now trading back below $1.21 level.
The news comes at the end of a tumultuous week for the global economy. Trade war tensions pushed the US and China to the brink of escalating their trade dispute on Monday after China allowed its currency, the renminbi (RMB), to fall below the key exchange rate of 7 RMB per US dollar – although by the end of the week the currency had stabilised above this point.
President Trump labelled China a “currency manipulator” in an angry tweet on Monday – a devaluation in the RMB currency takes the sting out of the tariffs he has imposed on Chinese goods. However, Trump stopped short of any further retaliation which suggests he knows that a further escalation will cost the US dear in terms of falls in equity markets – something he is desperate to avoid. With no end in sight to trade tensions and central banks in New Zealand, India, Thailand and the Philippines all cutting rates this week, analysts now predict another US rate cut next month, possibly as large as 0.5%.
Meanwhile the UK government’s stance on Brexit appeared to harden this week. Boris Johnson’s spokesman repeated that the UK will leave the EU on October 31, no “ifs or buts”, and Downing Street also refused to comment on whether Johnson would ignore a vote of no confidence or any vote by parliament against a no deal Brexit. Parliament is now awash with plots and plans to either block no-deal or seek a further extension. The week started on a more positive note, however, with data from the key UK services sector showing an improvement in July. The IHS Markit purchasing managers’ index for services produced a reading of 51.4, up from 50.2 in June – the best reading in 10 months. The composite reading for the UK economy, which includes the manufacturing and construction sectors, rose to 50.3 in July from 49.7 in June. Any reading above 50 suggests the economy is expanding rather than contracting, and points to a better start in the third quarter than it managed in Q2.
On Tuesday, however, data emerged suggesting that retailers had their worst month on record in July, as Brexit uncertainty weighed on consumer spending. The British Retail Consortium (BRC) and accountancy firm KPMG released data showing that total sales increased by 0.3% in July compared to a year earlier, marking the lowest annual growth rate since records began in 1995.
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