The British economy unexpectedly shrank in the second quarter for the first time since 2012 as Brexit uncertainties heaped pressure on firms, official figures showed Friday.
The decline is set to raise alarm that the economy could experience its first recession in a decade. Traders in currency markets appeared to reflect that concern, sending the pound down across the board, including to another 2-1/2 year low against the dollar of $1.2065.
The drop illustrates the market disappointment to the quarterly contraction, which lowered the annual growth rate to 1.2% from 1.8% in the first quarter. Most analysts expected the economy to flat-line.
In seeking to explain the fall in the April-June period, the Office for National Statistics noted there was “increased volatility around the U.K.’s original planned exit date from the European Union in late March.”
Brexit was meant to happen on March 29, but was delayed to the end of October after Parliament rejected the withdrawal agreement that the previous prime minister, Theresa May, had negotiated with the EU.
Before the extension was granted, many firms used up warehouse space to help them cushion the likely disruption from Britain crashing out of the EU on March 29 without a deal. That stockpiling boon helped the economy grow by 0.5% in the first quarter. When the extension was granted, there was less need for firms to stockpile.
The run-up to the original Brexit date also prompted many car companies to bring forward their annual maintenance shutdowns to April as they concluded that the early weeks of a no-deal Brexit would be the most disruptive.
The combination of these Brexit-related developments led to a sharp 1.4% quarterly decline in the output of production industries.
The fact that the overall economy performed worse than anticipated is likely to increase concern about Brexit’s corrosive effect on the economy. Business investment, which has been historically weak since the country voted in June 2016 to leave the EU, weakened further in the second quarter, contracting by 0.5%.
“Brexit uncertainty, and to a lesser extent, weaker global demand, has reduced firms’ appetites to expand,” said James Smith, an economist at ING bank. “Meanwhile, contingency planning activities for a no-deal Brexit are costly and often resource-intensive, reducing scope to lift capital spending.”
May’s successor, Boris Johnson, has insisted that Britain will leave the EU on Halloween come what may. Johnson is demanding the bloc renegotiate the deal it struck with May’s government, something that EU leaders are refusing to do.
That has stoked fears that Britain will leave the EU without a deal, which would see tariffs and other restrictions imposed on traded goods.
Most economists think that a no-deal Brexit would lead to a deep recession; even Brexit’s most passionate supporters say it would be disruptive in the short-term. The Bank of England has indicated there is a one-in-three chance of a recession early next year even if a smooth Brexit is negotiated.
John McDonnell, economy spokesman for the opposition Labour Party, blamed the government’s “Brexit bungling” for “tumbling business investment and stagnating productivity.”
Sajid Javid, Britain’s new Treasury chief, conceded that this is a “challenging” period for the global economy, but insisted the fundamentals remained “strong.”
“Wages are growing, employment is at a record high and we’re forecast to grow faster than Germany, Italy and Japan this year,” he said. “The government is determined to provide certainty to people and businesses on Brexit — that’s why we are clear that the U.K. is leaving the EU on 31 October.”
The British economy is not expected to fall into recession — commonly identified as two quarters of economic contraction — just yet as car manufacturers will be operating in August, having brought forward their maintenance period earlier in the year. And with all the talk of a no-deal Brexit again, firms could start to build up their stocks again. Friday’s figures also showed that British consumers remain upbeat as wages are rising solidly.
However, Brexit uncertainty looks like it will get more acute in September, when Parliament returns from its summer recess and the political debate and maneuvering around a no-deal Brexit intensifies. Opposition lawmakers are likely to try to bring down the government with a no-confidence vote in an attempt to avert a no-deal Brexit.
With so much in flux, business investment could take a further hit and consumers may also opt for caution as Halloween looms.
Add in worries over the global economy as a result of the trade conflict between the United States and China, and it’s clear there are lots of ghouls and ghosts about.
Jill Lawless contributed to this story.
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