UK Sidesteps Recession Despite Weakest Growth In A Decade

Wednesday, November 27th, 2019

According to the Office for National Statistics, the U.K.’s year-over-year growth in the three month period, ending in September, dropped from 1.3% to 1%.

Before the 2016 Brexit referendum, the economy normally experienced growth at more than 2% per year.

The economy averted a recession with a growth of .3% in the third quarter. It had shrunk the second quarter, and just two-quarters of contraction would have thrust the UK into a recession.

Compared to last year, it was the weakest growth in a decade.

Even though the economy avoided a recession, Ruth Gregory, senior UK economist at Capital Economics, said the economy was “pretty soft.”

After the second-quarter contraction, the GDP figures demonstrate that the economy failed to gain momentum.

Artur Baluszynski, head of research at Henderson Rowe, said that although the U.K. dodged a recession, “it may struggle to expand if the rest of the global economy is slowing.”  He also expects that the next quarter will be modest due to political uncertainty and trade tensions.

The persistent uncertainty due to the delay with the Brexit process is also playing a negative role. It means that the U.K. will remain as an unstable environment to invest for business.  This also contributes to slower growth.

In the fourth quarter, a U.K. general election is scheduled and this carries a potential risk for a “hung Parliament” or a socialist Labour party forming a coalition government. This could further decelerate and even stagnate the economy as the year comes to an end.

The 0.3% growth was attributed to the 0.4% growth in July, largely due to the strength of the manufacturing and pharmaceutical sectors.  The services and construction sectors also contributed to the growth due to seasonal trends.

An increase in U.K.-based film and TV production contributed to the information and communication industry’s sixth consecutive period of growth. It increased by 0.8%.

Wholesale, retail and motor trades experienced a 0.3% increase in the quarter from 0.1% in the previous quarter.

The official figures also show that the monthly GDP growth was negative 0.1% in September. All the major sectors showed either zero or negative growth.

It is believed in the markets that the Bank of England is “ readying itself for another rate cut rather than a rate rise.”

Chief Economist at the Institute of Directors, Tej Parikh, expressed his fear of a potential lag in growth during the current quarter, adding:

“The UK economy has been in stop-start mode all year, with growth punctuated by the various Brexit deadlines. Indeed, the pick-up in the third quarter numbers may slightly exaggerate the strength in the economy, with some activity likely to have been brought forward before October 31st. The final quarter of 2019 could be weaker as stockpiles continue to be run down.”

In Conclusion

Although avoiding a recession is a good sign and welcomed news, very few experts and politicians are celebrating. Most would agree that the government should focus its efforts in stimulating economic activity and eventually move the U.K. away from its current “yo-yo” pattern of growth.

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