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Chance of rate cut increases as GDP sees first negative quarter since 2012

Rolling three-month growth contracted for the first time since Q4 2012.

Rozi Jones
|
9th August 2019
bank of england boe
"A rate cut this side of Christmas is looking ever more likely under in a “no deal” Brexit scenario."

UK GDP contracted by 0.2% in Q2 following growth of 0.5% in the first quarter, according to the latest ONS statistics.

Its figures show that rolling three-month growth - comparing quarterly GDP with the previous three-month period - contracted for the first time since Q4 2012.

Rolling three-month growth was negative 0.2% in June, continuing the steady decline that followed the relatively strong growth seen earlier in the year.

Monthly GDP growth was flat in June, as services showed no growth for the fourth month in a row. The production sector contracted by 1.4% in Q2, providing the largest downward contribution to GDP growth; the fall was driven by a sharp decline in manufacturing output, reflective of increased volatility in the first half of 2019.

Additionally, month-on-month GDP growth in April and May have both been revised down by 0.1 percentage points each.

Rob Kent-Smith, head of GDP at the ONS, said: “GDP contracted in the second quarter for the first time since 2012 after robust growth in the first quarter. Manufacturing output fell back after a strong start to the year, with production brought forward ahead of the UK’s original departure date from the EU.

“The construction sector also weakened after a buoyant beginning to the year, while the often-dominant service sector delivered virtually no growth at all.

“The trade deficit narrowed markedly, as imports fell following a sharp rise in the first quarter ahead of the UK’s original departure date from the EU.”

Nancy Curtin, chief investment officer of Close Brothers Asset Management, commented: “There’s no denying that the UK’s GDP figures are a cause for concern. However, the jury’s still out on the extent of inventory built-up. We are likely to see a similar phenomenon ahead of October, as firms look to mitigate supply chain disruption in the case of a no-deal Brexit, which may provide short-term support for GDP.

“On the whole though, there’s no doubt the UK is struggling. The services and automotive sectors have decelerated, construction and manufacturing have declined, and business activity has stalled. The impact of Brexit is no doubt exacerbated by the wider global slowdown. The MPC has already warned on Britain’s growth forecasts, and a rate cut this side of Christmas is looking ever more likely under in a “no deal” Brexit scenario. On the bright side, the Prime Minister’s plans for ‘boosterism’ – government spending to support the UK economy – could serve as a counterbalance to recent stagnation. With uncertainty over Brexit still high, however, the outcome for growth remains uncertain.

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