British Prime Minister Theresa May. Picture: Neil Hall
British Prime Minister Theresa May. Picture: Neil Hall

UK’s economy before Brexit

By Jill Ward Time of article published Jul 27, 2016

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London - The UK economy had a stronger-than-expected performance before the shock decision to leave the European Union.

Growth accelerated to 0.6 percent in the second quarter from 0.4 percent in the first, the Office for National Statistics said in London on Wednesday. The median forecast in a Bloomberg survey was for an expansion of 0.5 percent.

The pickup may mark the end of more than three years of uninterrupted growth. Recent surveys suggest the Brexit vote last month delivered an immediate blow to business and consumer sentiment, with retail sales falling the most in more than four years in July. Economists predict gross domestic product will fall this quarter and next, putting Britain into its first recession since 2009.

“We have limited data on the economy post-referendum, but what we do have points towards a significant deterioration,” said Simon Kirby, an economist at the National Institute of Economic and Social Research.

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The loss of confidence could hit investment, jobs and consumer spending, piling pressure on Bank of England Governor Mark Carney and Prime Minister Theresa May to deliver monetary and fiscal stimulus. The pound has fallen 12 percent against the dollar since the referendum. It was at $1.3088 as of 11:13 a.m. London time, down 0.3 percent on the day.

Strong april

Services, the largest part of the economy, grew 0.5 percent in the second quarter. Industrial production expanded 2.1 percent, the biggest increase since 1999, as manufacturing jumped 1.8 percent and energy output surged. Construction fell 0.4 percent. GDP rose 2.2 percent from a year earlier.

Growth was skewed toward the start of the quarter, with all three sectors posting strong gains in April. Services and industrial production were broadly flat over the following two months and construction declined, suggesting activity was weakening prior to the referendum.

The estimate is the first for the quarter and is based on less than half of the data that will inform later reports.

In a one-time survey taken in the aftermath of the referendum, Markit Economics found business activity contracting at the fastest pace since the last recession seven years ago.

Rate cut seen

Virgin Money, the bank backed by billionaire Richard Branson, has postponed plans to start lending to small businesses, citing the potential economic impact of Brexit. Homebuilder Taylor Wimpey said on Wednesday that it saw a “small increase” in customer cancellation rates after the EU vote.

With BOE policy maker Martin Weale declaring this week he’s now in favour of immediate stimulus, investors are convinced the Monetary Policy Committee will cut interest rates to a new record low next week. Weale told the Financial Times that any action taken now will take time to feed into the economy and therefore may not stop output declining in the near-term.

Markets are also prepared for the government to allow higher borrowing after Chancellor of the Exchequer Philip Hammond said last week that he’s ready to “reset” fiscal policy to help the economy deal with the shock of Brexit.

Fiscal pledge

In a statement released by the Treasury, Hammond said the latest growth figures show Britain is entering negotiations to leave the EU from a position of economic strength.

“Those negotiations will signal the beginning of a period of adjustment, but I am confident we have the tools to manage the challenges ahead, and along with the Bank of England, this government will take whatever action is necessary to support our economy and maintain business and consumer confidence,” he said.

Britain is the first Group of Seven nation to report second-quarter GDP. The US is due to publish its estimate on Friday, two days after the Federal Reserve announces its latest policy decision. Economists see US growth accelerating to 2.6 percent on an annualised basis. The UK grew at an annualised pace of 2.4 percent in the period.

-With assistance from Harumi Ichikura and Mark Evans.


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