As the impact of the Brexit vote led to a pronounced weakening in economic activity, the UK economy shrank last month, claimed one of Britain’s leading economic thinktanks.

The gross domestic product contracted by 0.2% in July, estimated the National Institute of Economic and Social Research (Niesr).

In the weeks immediately before and after the EU referendum on June 23, factory production eased back and the UK trade deficit widened, showed  official government figures and the Niesr findings came soon after that.

“We estimate that in the three months to July, the UK economy grew by 0.3%, a marked economic slowdown. The month-on-month profile suggests that the third quarter has got off to a weak start, with output declining in July. Our estimates suggest that there is around an evens chance of a technical recession by the end of 2017,” said James Warren, a research fellow at Niesr.

With output dropping by 0.3, the spurt in manufacturing came to an end in June, according to data from the Office for National Statistics (ONS) and this formed the basis of the gloomy conclusion of the thinktank. Meanwhile, with the trade deficit rising by £0.9bn to £5.1bn, the UK exports failed to match imports.

The pound fell on the foreign exchanges due to the poor trade and manufacturing figures. The sterling threatened to reach a post-Brexit vote low when it dipped below $1.30 at one stage, before later rallying.

However uncertainty caused by the closely fought referendum campaign does not seem to have led the industry in adopting a cautious approach, the ONS said.

“As we previously highlighted in our preliminary estimate of GDP, production and the wider economy grew strongly in April, and then remained at roughly the same level throughout May and June. Any uncertainties in the run-up to the referendum seem to have had little impact on production, with very few respondents to our surveys reporting it as an issue,” said the organisation’s chief economist, Joe Grice.

From May to June, total production, which includes mining, output from the North Sea, energy supply and manufacturing, increased by 0.1%, the ONS said. With a fall of 0.3%, the biggest component of production was manufacturing.

While manufacturing rose by 1.8%, production was up by 2.1% on the previous quarter during the three months to June – which is considered a better guide to the trend than one month’s figures.

Manufacturing and overall production remain well below the peak reached in early 2008 despite the strong quarterly increases. UK was under recession in 2008. While manufacturing is 4.5% lower, production is 7.5% below the early 2008 level due to a steady decline in North Sea oil and gas output.

It has been hard for Britain to close its trade gap with the rest of the world due to the struggles of manufacturing during and after the recession of 2008-09.

“The latest data suggests manufacturing posted some significant gains in the second quarter. Growth was supported by record levels of exports of cars to the EU and aircraft to non-EU markets. Clearly, indicators of sentiment post referendum suggest that we’ve hit the high point for manufacturing this year. Amid the wavering levels of confidence, however, we should take away some positive news, firstly that manufacturing entered this period of uncertainty from a relatively strong stance, and the weaker exchange rate could yet bring benefits on the export side,” Lee Hopley, the chief economist at manufacturers’ association EEF, said.

(Adapted from The Guardian)

Categories: Economy & Finance