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UK economy shrinks for first time since 2012 as Brexit bites

Updated August 10, 2019

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The decline is set to raise alarm that the economy could experience its first recession in a decade. — AFP/File
The decline is set to raise alarm that the economy could experience its first recession in a decade. — AFP/File

LONDON: The British economy unexpectedly shrank in the second quarter for the first time since 2012 as Brexit uncertainties heaped pressure on firms, official figures showed on Friday.

The decline is set to raise alarm that the economy could experience its first recession in a decade. Traders in currency markets appeared to reflect that concern, sending the pound down across the board, including to another 2.5-year low against the dollar of $1.2065.

The drop illustrates the market disappointment to the quarterly contraction, which lowered the annual growth rate to 1.2pc, from 1.8pc in the first quarter. Most analysts expected the economy to flat line.

In seeking to explain the fall in the April-June period, the Office for National Statistics noted there was “increased volatility around the UK’s original planned exit date from the European Union in late March.” Brexit was meant to happen on March 29, but was delayed to the end of October after Parliament rejected the withdrawal agreement that the previous prime minister, Theresa May, had negotiated with the EU.

Before the extension was granted, many firms used up warehouse space to help them cushion the likely disruption from Britain crashing out of the EU on Mar 29 without a deal. That stockpiling boon helped the economy grow by 0.5pc in the first quarter. When the extension was granted, there was less need for firms to stockpile.

The run-up to the original Brexit date also prompted many car companies to bring forward their annual maintenance shutdowns to April as they concluded that the early weeks of a no-deal Brexit would be the most disruptive.

The combination of these Brexit-related developments led to a sharp 1.4pc quarterly decline in the output of production industries.

Published in Dawn, August 10th, 2019