Published: Tue, August 13, 2019
Markets | By Otis Pena

Britain's GDP sees first contraction in Q2 since 2012

Britain's GDP sees first contraction in Q2 since 2012

The pound fell after the report, sliding to $1.2117 as of 10:17 London.

"The often-dominant service sector delivered virtually no growth at all", said Rob Kent Smith, head of national accounts at the Office for National Statistics.

In the most startling economic warning sign since the 2016 Brexit referendum, gross domestic product stood at -0.2 percent for the three months leading to June, compared with the previous quarter.

Why is the economy shrinking?

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

The fall came after a surprisingly strong first quarter that saw inventories build up ahead of the initial March 31 date for the United Kingdom to leave the European Union.

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.

The UK economy contracted for the first time since 2012.

Meanwhile, Javid added: "We saw some significant stockpiling by British businesses in anticipation of the Brexit that never was [on March 29], and now they're using those stockpiles, that is coming down".

This figure though is set to be the worst in the G7.

The combination of these Brexit-related developments led to a sharp 1.4% quarterly decline in the output of production industries.

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Also, Brexit is not a one-way street of bad economic news, as highlighted by the NTMA in a presentation issued on Friday, which noted the possibility of increased foreign investment and that Irish firms could win market share in Europe at the expense of the UK.

What is the chancellor saying?

"I'm not expecting a recession at all", Javid told the BBC.

"And in fact, don't take my word for it". That's lower than what experts had expected (they had forecast growth to be flat).

"Total business investment is down as the stockpiling "bounce" from Q1 faded, having a more severe impact than anticipated", he added. Industrial output fell in Germany on Wednesday, while Italy's debt has increased massively.

Sajid Javid, Britain's new Treasury chief, conceded that this is a "challenging" period for the British economy but insisted that the fundamentals remain "strong".

But John McDonnell, the shadow chancellor, said the "dismal economic figures are a direct result of Tory incompetence".

No-deal Brexit fears also continued to rise today, following comments from Labour leader Jeremy Corbyn, who accused Prime Minister Boris Johnson of plotting to force a no-deal on October 31.

Javid said the figures "were not a surprise in any way" and represented volatility in the run-up to Brexit, which would be resolved by leaving the European Union on October 31.

The employers' body, the CBI, said the contraction was "concerning".

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