UK economy rebounds to avoid recession

City of London

Unless the economy improves and a smooth Brexit is achieved, interest rates may be lowered.  The first release of UK GDP for the third quarter shows the economy avoided a technical recession.

Real GDP growth was 0.3% quarter-on-quarter compared to -0.2% in the second quarter, although the latest figure did disappoint consensus expectations of 0.4%.

Within the details of the report, growth in the production sectors, including manufacturing, stalled in the third quarter after a heavy contraction in the previous quarter. The service sector was the main driver of growth, as construction also made a positive but small contribution.

The expenditure breakdown shows households are still spending at a steady pace. However, business confidence remains in the doldrums as business investment failed to pick-up, and has only had a single positive quarter of growth since the start of 2018.

It is worth mentioning that the government has not helped matters. General government investment contracted 1.8% in real terms in the latest release, having contracted by 3.6% in the second quarter.

The rest of the data remains heavily distorted by Brexit stockpiling and destocking. In the latest release, companies were destocking following the large build-up of inventories that occurred at the start of the year. Given the Brexit deadline was shifted to 31 October, we will probably see some further stockpiling in fourth quarter data.

Overall, the data suggests that the economy is coping with the uncertainty from Brexit. Households continue to spend, though businesses remain cautious. Leading indicators suggest the economy will slow further in coming months as external headwinds start to hit the economy.

This was cited as a key concern by the Bank of England at its new Monetary Policy Report press conference. It suggested that without a smooth Brexit with a “deep free trade agreement”, and an improvement in both the domestic economy and global trade, then interest rates may remain at current levels, or even be cut. Indeed, two of the nine members of the monetary policy committee think a cut is needed now.

 


The above article was previously published by Schroders on 11th November 2019