There is shrinkage in the United Kingdom economy in for the first time in almost seven year and it could be pushed into a recession because of Brexit.
The Office for National Statistics said Friday that there was a contraction of 0.2 per cent quarter on quarter in the GDP of the country in the quarter ended June. It also expects exports growth to be flat.
This contraction for t UK comes at a very bad time because there is an overall slowdown in the global economy which has been compounded with by fears that a no deal Brexit could hurt the UK economy further.
The new Prime Minister of the country Boris Johnson has pledged that he would take the country out the European Union on October 31 with or without a deal. But according to government forecasts, such a situation would plunge the economy into recession.
Last quarter, the economy was dragged down by uncertainty over Brexit.
The inventory that companies had built up in anticipation of the March 29 exit of the UK from the EU was offloaded during the quarter. Growth was also affected because of partial and complete shutdown at car plants which were planned to coincide with the deadline.
A drop in manufacturing output had the largest impact on the economy as it caused a 1.4 per cent shrinkage in the production sector. The environment of uncertainty has bene compounded by the weakness in other parts of the economy.
“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.
On the other hand, there is a continuous downward trend in business investment. And as companies invest more of their resources into planning for a messy Brexit, it is unclear whether investment in business would look up any time soon.
“Contraction in the second quarter is a rude awakening,” said Tej Parikh, chief economist at the Institute of Directors, a business lobby. “While consumers have helped keep the economy afloat, it is increasingly worrying that underlying growth is largely absent.”
However some positive sides of the data were highlighted by the UK government. The contract comes during a “challenging period across the global economy”, said Treasury chief Sajid Javid. “The fundamentals of the British economy are strong — wages are growing, employment is at a record high and we’re forecast to grow faster than Germany, Italy and Japan this year,” Javid said.
An immediate recession would be avoided by the UK by rebounding in the current quarter, believes many economists.
According to James Smith, developed markets economist at Dutch bank ING, there should be a boost because of resumption of stockpiling of products together with some increase in consumer spending.
“The contraction in the second quarter appears at this stage to be an outlier,” Commerzbank economist Peter Dixon said.
However a disorderly Brexit could quickly derail any recovery.
“We would expect to see quite a sharp contraction — an instantaneous contraction, almost,” Dixon said.”There are downside risks to the UK forecast, whatever happens to Brexit,” he added
(Adapted from CNN.com)