U.K. economic activity contracts in Q2 2019

U.K. second quarter GDP’s preliminary estimate showed that the economic activity’s level dropped 0.2 percent in the quarter, the first contraction since the fourth quarter of 2012. This shows a considerable slowdown in activity from the 0.5 percent quarter-on-quarter pace seen in the first quarter and takes the annual rate of U.K. GDP growth to 1.2 percent from 1.8 percent previously. The print was not just softer than market expectations, but also below the -0.1 percent implied by the PMIs, noted Lloyds Bank in a research report.

This has raised the prospect that the U.K. economy might see a technical recession. Nevertheless, that appears to be unlikely, said Lloyds Bank. The economic activity was widely anticipated to decelerate sharply in the second quarter, as the unwinding of several effects which temporarily pushed up GDP growth above its trend in the first quarter, were expected to be a drag on the second quarter activity.

This mainly reflects the unwinding of stockbuilding that stimulated growth by about 0.4 percentage points in the first quarter that stemmed from companies’ seeking to restrict the damage that might have occurred from a material disruption in supply chains ahead of the original 29th March Brexit deadline.

This effect’s absence in the second quarter, and the possibility that stock levels were somewhat drawn down in the second quarter, was judged to have reduced GDP by 0.8 percent in the June quarter. Meanwhile, the Bank of England’s recent Inflation Report implied this reduced activity by 0.1 percent in the second quarter.

Spending by households continued to be positive in the second quarter. That implies that consumer spending continues to shoulder the burden of growth in the U.K. With the jobless rate at its lowest since 1975 and demand for labor still holding up, it is possible that the U.K. labor market continues to stay tight.

“This dynamic, along with some further increases in wage growth, should ensure that, outside of the volatility generated by Brexit-related effects, the UK returns to growth in the third quarter”, said Lloyds Bank.