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UK economy contracts in December as pre-Brexit slowdown bites - business live UK economy contracts in December as pre-Brexit slowdown bites - business live
(35 minutes later)
Sky News have broadcast an interview with Philip Hammond, in which the chancellor warns that the failure to agree a Brexit deal is hurting the economy.
Asked about the slowdown in growth to just 0.2% in the last quarter, Hammond replies:
It’s a solid performance from the economy when you took at what’s happening globally and in other competitor countries.
But of course there is no doubt that our economy is being overshadowed by the uncertainty created by the Brexit process.
The soon we can resolve that the better, and the quicker we can get back to more robust growth in the future.
Chancellor @PhilipHammondUK tells me: “There is no doubt that our economy is being overshadowed by the uncertainty from Brexit.. this has gone on longer than we wanted”
Hammond (a former Remain supporter who now favours a softer Brexit) also admitted that he’s expected an agreement to be signed by now.
I’m afraid this has gone on longer than we would have liked.
We would have liked to have been able to bank this at the back end of last year, but I’m confident that we will get it done, and that’s the important thing that business needs to here.
Professor Costas Milas of Liverpool University says today’s UK GDP figures are bad, and also worse than the Bank of England predicted in its Inflation Report last week (when it also estimated a one-in-four chance of a recession in 2019).
He tells us:
Indeed, the Bank’s forecasts assumed annual growth of 1.36% as the most likely outcome for 2018 Q4. Today’s ONS data readings suggest even lower annual growth at 1.3% for 2018 Q4 and a GDP contraction of 0.4% in December.
Quite worryingly, the “carry over” effects of the above readings indicate that the risk of recession has risen... Will politicians take (any) notice?
UK trade secretary, Dr Liam Fox, has blamed China’s cooling economy for Britain’s weak growth, rather than Brexit.UK trade secretary, Dr Liam Fox, has blamed China’s cooling economy for Britain’s weak growth, rather than Brexit.
Speaking in Bern this morning, Fox said:Speaking in Bern this morning, Fox said:
“Clearly there are those who believe that Brexit is the only economic factor applying to the UK economy.“Clearly there are those who believe that Brexit is the only economic factor applying to the UK economy.
I think you’ll find that the predicted slowdown in a number of European economies is not disconnected from the slowdown, for example, in China”.I think you’ll find that the predicted slowdown in a number of European economies is not disconnected from the slowdown, for example, in China”.
He saw speaking after signing a trade continuity agreement to guarantee future trading terms between the UK and Switzerland after Brexit.He saw speaking after signing a trade continuity agreement to guarantee future trading terms between the UK and Switzerland after Brexit.
Here’s another neat chart from Rupert, putting the UK slowdown in context:Here’s another neat chart from Rupert, putting the UK slowdown in context:
UK economic growth of 1.3%y/y in Q4 2018 puts it in the middle of the pack for those OECD countries that have reported thus far. Before we get too excited though, the pack is not exactly going great guns... pic.twitter.com/nE3jF1EV8SUK economic growth of 1.3%y/y in Q4 2018 puts it in the middle of the pack for those OECD countries that have reported thus far. Before we get too excited though, the pack is not exactly going great guns... pic.twitter.com/nE3jF1EV8S
UK service companies, builders and manufacturers all had a relatively tough 2018, with growth the weakest in at least five years.UK service companies, builders and manufacturers all had a relatively tough 2018, with growth the weakest in at least five years.
The ONS says:The ONS says:
Headline annual gross domestic product (GDP) growth was 1.4% in 2018, the lowest it has been in six years.Headline annual gross domestic product (GDP) growth was 1.4% in 2018, the lowest it has been in six years.
Meanwhile, the services sector had annual growth of 1.7%, the lowest since 2011 and the production sector had annual growth of 0.7%, the lowest since 2013. Construction annual growth was 0.6%, the lowest since 2012Meanwhile, the services sector had annual growth of 1.7%, the lowest since 2011 and the production sector had annual growth of 0.7%, the lowest since 2013. Construction annual growth was 0.6%, the lowest since 2012
When company bosses are nervous about the future, they stop buying new machinery and put off expanding into new premises.When company bosses are nervous about the future, they stop buying new machinery and put off expanding into new premises.
That makes business expenditure a good measure of the underlying health of the economy, as (used wisely) it should deliver faster growth and higher productivity.That makes business expenditure a good measure of the underlying health of the economy, as (used wisely) it should deliver faster growth and higher productivity.
So the recent slide in business spending is a concern; these charts from economist Rupert Seggins shows the scale of the deterioration:So the recent slide in business spending is a concern; these charts from economist Rupert Seggins shows the scale of the deterioration:
1. UK fixed investment fell again, by -1.4%y/y, the third fall in a row. This was driven by business investment (-2%y/y contribution) and for the first time since Q1 2013, housing investment (-0.1%y/y contribution). It was left to government investment to provide any boost. pic.twitter.com/jrPwHaehCa1. UK fixed investment fell again, by -1.4%y/y, the third fall in a row. This was driven by business investment (-2%y/y contribution) and for the first time since Q1 2013, housing investment (-0.1%y/y contribution). It was left to government investment to provide any boost. pic.twitter.com/jrPwHaehCa
2. In terms of the what, there was only one source of boost to growth, which was non-residential buildings % costs of ownership transfer (0.8%y/y contribution). Transport, ICT and intellectual property investment all fell, as did housing investment. Not a pretty picture. pic.twitter.com/NCeq21XQw92. In terms of the what, there was only one source of boost to growth, which was non-residential buildings % costs of ownership transfer (0.8%y/y contribution). Transport, ICT and intellectual property investment all fell, as did housing investment. Not a pretty picture. pic.twitter.com/NCeq21XQw9
Yael Selfin, chief economist at KPMG UK, is also concerned, saying:Yael Selfin, chief economist at KPMG UK, is also concerned, saying:
“It is particularly worrying to see business investment contracting significantly again, as it will impact the UK’s longer term productive capacity as well as productivity performance, and points at a low vote of confidence from business in the UK’s future. The contraction in manufacturing, despite the relatively weak pound and while the UK economy is still enjoying the benefits of the EU trade framework is also a worry for what to come.“It is particularly worrying to see business investment contracting significantly again, as it will impact the UK’s longer term productive capacity as well as productivity performance, and points at a low vote of confidence from business in the UK’s future. The contraction in manufacturing, despite the relatively weak pound and while the UK economy is still enjoying the benefits of the EU trade framework is also a worry for what to come.
“As on many other occasions, the economy was bolstered by households who continued to spend, albeit more reluctantly, and by a pick-up in government spending, which will not be sustainable in the long run. We need to see a recovery in business confidence and investment to get the UK economy moving again.”“As on many other occasions, the economy was bolstered by households who continued to spend, albeit more reluctantly, and by a pick-up in government spending, which will not be sustainable in the long run. We need to see a recovery in business confidence and investment to get the UK economy moving again.”
You can see the UK GDP report online, here.You can see the UK GDP report online, here.
While quarterly GDP data are volatile (and monthly even more so), the long-term picture of UK growth is clear:While quarterly GDP data are volatile (and monthly even more so), the long-term picture of UK growth is clear:
Quarter-on-quarter GDP growth in the last quarter of 2018 was 0.2%. Weak, but not the weakest of 2018 - it was just 0.1% back in Q1 2018. Overall, not a good year for GDP growth. pic.twitter.com/3Ewibfu5nZQuarter-on-quarter GDP growth in the last quarter of 2018 was 0.2%. Weak, but not the weakest of 2018 - it was just 0.1% back in Q1 2018. Overall, not a good year for GDP growth. pic.twitter.com/3Ewibfu5nZ
Economist Sam Tombs is hopeful that Britain will avoid a recession this year:Economist Sam Tombs is hopeful that Britain will avoid a recession this year:
December GDP data look awful, but the drop was driven by the construction and retail sectors, which are always volatile. Keep calm and carry on expecting slow growth, not a recession. pic.twitter.com/Y2yNZg8NnGDecember GDP data look awful, but the drop was driven by the construction and retail sectors, which are always volatile. Keep calm and carry on expecting slow growth, not a recession. pic.twitter.com/Y2yNZg8NnG
Chancellor Philip Hammond has pointed out that the UK economy “continues to grow”, overlooking the fact it did quite the opposite in December.Chancellor Philip Hammond has pointed out that the UK economy “continues to grow”, overlooking the fact it did quite the opposite in December.
Here is my response to today’s #GDP figures. pic.twitter.com/AdGyXFvaklHere is my response to today’s #GDP figures. pic.twitter.com/AdGyXFvakl
Ben Brettell, senior economist at Hargreaves Lansdown, says the UK economy was buffeted by problems at home and overseas:
There’s little doubt Brexit uncertainty is responsible for the disappointing numbers, though concerns over global trade will also have played a part.
Business investment – the most Brexit-sensitive element of GDP - dropped 3.7% Q4 against a year earlier, the biggest fall since early 2010.
The UK isn’t the only country that struggled to post strong growth in the last quarter of 2018.
Italy’s economy shrank by 0.2%, putting the eurozone’s third-largest member into recession.
France did better, expanding by 0.3% despite the disruption caused by the gilet jaune protests.
The wider European Union grew by 0.3%, while the eurozone only managed 0.2%.
Germany’s GDP data is due on Thursday; it’s expected to show growth of just 0.1%, following a small contraction in the summer.
We’re also waiting for US GDP, which has been delayed by the Federal shutdown. It’s likely to show growth of around 0.6% for the quarter.
Several economists are blaming uncertainty about Britain’s exit from the EU for the sharp slowdown in UK growth in the last quarter, to just 0.2%.
Tej Parikh, Senior Economist at the Institute of Directors, explains:
“The UK economy lost its summer exuberance in the final months of 2018, and there are signs of further chill winds ahead.
“The ongoing uncertainty around what happens after 29th March is the prime suspect behind sapped economic activity. There is currently a drag on growth as some businesses are forced to hold back on major investments and engage in cautionary stockpiling.
“The first half of 2019 will bring further challenges for the UK economy. China’s slowdown and weak growth in Europe are likely to bite at British exporters. At the same time, while consumers have shown resilience so far, many are becoming increasingly cautious with their wallets.
“The clock is ticking, but if a Brexit deal can be agreed, things should start to look sunnier as pent-up demand is released and firms begin investing again.”
James Smith, economist at ING, is also disappointed by the drop in business investment:
It was back to reality for the UK economy during the fourth quarter, according to the latest GDP figures. Growth slowed to just 0.2%, a stark contrast to the 0.6% reading seen during the third quarter when warmer weather gave the economy a temporary reprieve.
But the most alarming feature of these numbers is that fact that business investment fell for the fourth quarter in a row, as Brexit uncertainty continued to bite.
This is from Morten Lund, analyst at Nordea Markets:
🇬🇧#Brexit dragging on growthUK Q4 GDP at 0.2% q/q (Nordea 0.2%, consensus/BoE 0.3%). 4th consecutive quarter (and longest run since the financial crisis) with Business Investments declining. This is clearly related to Brexit uncertainty. Expect another bad reading in Q1! pic.twitter.com/GgSzon6L3j
In another blow, today’s GDP report shows that UK manufacturing has now contracted for six months in a row.
That means it’s in recession (defined as two consecutive quarters of negative growth) for the first time since the financial crisis.
The ONS says:
Production fell by 0.5% in the month of December 2018, also driven by manufacturing, which contracted by 0.7%.
This is the sixth consecutive monthly fall for manufacturing, which last occurred between September 2008 and February 2009.
Economist Andrew Sentance blames Brexit uncertainty for the slowdown:
Brexit uncertainty cl;early hitting UK GDP and investment. GDP growth in 2018 1.4pc, weakest since the financial crisis. Business investment has contracted in past 4 quarters and now nearly 4pc down on a year ago. UK already counting the cost and we have not left the EU yet!
Here’s a neat summary of the key points in the GDP report, via Bloomberg:
Consumer spending growth stayed at 0.4% in the fourth quarter but business investment slumped 1.4%, the most since the start of 2016. Services, the largest part of economy, slowed to 0.4% growth.
In December, all the main sectors of the economy shrank, with manufacturing falling for a sixth consecutive month, the longest run of declines since the financial crisis. The fall in overall GDP was the largest since March 2016.
The trade deficit narrowed to £12.1bn in value terms in December.
Growth in 2018 slowed to 1.4%
GDP rose 1.3% in the fourth quarter from a year earlier, the weakest since the second quarter of 2012.
Britain buckled under the strain of #Brexit uncertainty in 4Q. GDP increased a smaller-than-forecast 0.2 percent, compared with 0.6 percent in 3Q. December alone saw the economy shrink 0.4 percent, the most since before the 2016 vote to leave the EU. https://t.co/K9cdaNdCwa
The annual growth figures also paint a worrying picture.
The UK economy only expanded by 1.4% in 2018, the weakest performance since 2012.
UK carmakers and steel producers had a particularly bad quarter, says Rob Kent-Smith, head of GDP at the ONS:
“GDP slowed in the last three months of the year with the manufacturing of cars and steel products seeing steep falls and construction also declining. However, services continued to grow with the health sector, management consultants and IT all doing well.
“Declines were seen across the economy in December, but single month data can be volatile meaning quarterly figures often give a better indication of the health of the economy.
“The UK’s trade deficit widened slightly in the last three months of the year, while business investment again declined, now for the fourth quarter in a row.”
Britain’s services sector provided the bulk of the growth in the final three months of 2018.
Services output expanded by 0.4% in October-December, while manufacturing output shrank by 0.9% in the quarter.
And in December alone, services, manufacturing and construction ALL contracted, as this chart shows:
In another blow, the UK economy actually shrank in December.
The Office for National Statistics reports that GDP shrank by 0.4% in the final month of 2018. That’s worse than expected -- economists had predicted that the economy might have flatlined during the month.
This will intensify fears that Britain’s economy is suffering from Brexit anxiety, the trade war between the US and China, and weakness in the eurozone (where Italy has fallen into recession) and beyond.