British Economy Escapes Recession But Grows at The Slowest Annual Pace Since 2010

  • Nov 12, 2019 GMT
  • Team Kalkine
British Economy Escapes Recession But Grows at The Slowest Annual Pace Since 2010

The British economy grew by 0.3% in the three months to September 2019

  • The service sector- a key driver to Q32019 GDP growth, increased by 0.4%
  • GDP skids 0.1% in September 2019

The British economy managed to avoid a recession by improving 0.3% in the third quarter of 2019, but the growth expanded at the slowest pace since 2010. The recorded growth was also below the consensus estimates of 0.4%.

GDP after contracting in the second quarter of 2019, grew steadily in the third quarter to September, primarily driven by strong July, while services again led the league with construction also doing well. Meanwhile, manufacturing growth slumped, although, a decline in many industries were counterbalanced by car production, which bounced back in the reported period following April closure.

In the July to September period of 2019, GDP improved by 0.3% against a contraction of 0.2% in the preceding quarter. On a YoY basis, it recorded an expansion of 1% against the same quarter of the corresponding year; however, it was the lowest rate of growth the UK recorded post-January to March 2010 (Q12010).

Sectoral Contribution to the Q32019 Gross Domestic Product (GDP)

Source: Office of National Statistics (ONS)

The dominant service sector was the key driver to the growth in the gross domestic product (GDP) to the quarter ended September 2019, expanding 0.4% and contributed 0.29 percentage points. Construction also did well over the same period, recording the first positive rolling three-month growth since May 2019. The firm growth in both services and construction were primarily driven by remarkable strength in the month of July.

However, production remained flat in the quarter ended to September 2019; this sector has not witnessed rolling-three-month growth since April 2019. Manufacturing the biggest sub-sector of production also remained flat in the third quarter under consideration.

Gross Domestic Product slumped 0.1% in September 2019

Source: Office of National Statistics (ONS)

On an MoM basis, September 2019 GDP growth rate was negative at 0.1%, with all main sectors posting zero or negative growth. However, a lacklustre April-June 2019 quarter of 2019, along with firm growth in services and construction in July 2019, resulted in a positive third quarter ended September 2019.

During the third quarter under consideration, the services sector recorded a growth of 0.4%, primarily driven by strong growth in July 2019 against a very weak April 2019. Information and Communication was the largest contributor to this growth, which surged 0.8% and has been the fastest-growing sub-sector within services over the past two years. Also, sub-sectors like motion picture and computer programming recorded strong strength over the same period. However, the sector's performance dipped in July 2019 before flat growth it recorded in September 2019.

Also, construction recorded quarterly growth of 0.6% in the three months to September 2019, led by a spurt in private new housing, private commercial and private industrial. However, it slumped 0.2% in September 2019, driven by a reduction in non-housing repair and maintenance, and public housing repair and maintenance.

Nominal Gross Domestic Product (GDP) expanded 0.5% in three-month to September

During the quarter under consideration, nominal gross domestic product narrowed to 0.5% against the surge of 0.7% recorded in the second quarter of 2019, primarily driven by a 0.9% increase in compensation of employees.

Clive Docwra, Managing Director of construction consulting and design agency McBains, commented that: “The recent data for construction activity in the UK reflects the challenges the sector is witnessing. It reflects a surge in new construction activities during July to September quarter, and notably superior to forecasted increase in housing, commercial and industrial new work, but also a slowdown in September as well”.

He further added that in September 2019, the trend could continue over the next few months, primarily because of last month's confirmation of a further delay in the UK's withdrawal from the EU bloc. Also, businesses and investors do not like prolonged uncertainty on anything; therefore, the ongoing Brexit saga plus added uncertainty over December 12, general election outcome indicates that there will be a continued worry to pour funds in new projects.

Alfie Sterling of the New Economics Foundation tweeted that; “the big question is not whether Gross Domestic Product has recorded growth over the past couple of months. The real question is why, post inflation adjustment the actual costs faced by Households, Gross Income Per Person is still lower today than they were in 2008”.

Meanwhile, recently the global rating agency Moody’s Investors Services indicated that there are higher possibilities that it could downgrade credit rating on UK government's debt amid a contraction in institutional strength and blamed Brexit for this.

The global rating agency has changed its stance on its Aa2 rating for the London's debt from "stable" to "negative", which reflects that a rating cut is certain to take place in near-term. In its report, the rating agency also wrote that the Brexit saga and its post effects would be long-lasting, and it also added that both Conservative and Labour leaders during December 12, general election pledged high spending, which could risk the British economy again.

Conclusion

The lower than expected GDP growth during the third quarter of 2019 was also on account of weak stockpiling activity ahead of March UK departure from EU deadline. The British economy was largely volatile in 2019, largely underperforming against the Eurozone performance in the second quarter and slightly ahead of it in the third quarter to September 2019.

Also, despite construction emerging as one of the best performing sectors during the July-September quarter and recording a growth of 0.6%, the present economic deadlock poses risks to this sector and could pull the sector back again in the remaining quarter of 2019.

Meanwhile, post GDP data release by the Office for National Statistics (ONS), the Pound Sterling got support in the November 11 session, and despite a volatile range between $1.2786- $1.2896, it managed to close the session 0.47% higher at 1.2854, however, in November 12 session, (before the market close at 10:56 AM GMT), Pound pared some of last day’s gains against the US Dollar and traded 0.15% lower against the previous close at  $1.2835.

While a positive outcome of the December General Election could support the British economy, the Labour party coming to power or a Hung Parliament would weigh down the British economy further. But, amid all the gloom and concerns, the UK avoiding recession and returning to growth is a welcome sign and has soothed the nerves of the people.

 

 

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