U.K. Economy Shrinks, Taking A Step Toward Recession For First Time Since 2012

Aug 9, 2019
Originally published on August 9, 2019 4:52 pm

The U.K. economy contracted by 0.2% in the most recent quarter, feeding fears of a recession as the country approaches a deadline to exit from the European Union. The last time the economy shrank was nearly seven years ago, in late 2012. Economists had been expecting a flat quarter from the economy, not a contraction.

If the U.K. sees similar negative growth in the current quarter, the country will officially be deemed to be in a recession.

The surprising result comes as the U.K. economy has endured "particularly volatile" conditions so far in 2019, the Office for National Statistics says, in which businesses struggled first to adapt to the country's planned exit from the European Union in the spring — and then adjusted to new uncertainties as that deadline was extended through October.

The news sent the British pound skittering to a loss, falling to a more than two-year low against the U.S. dollar at $1.21 while also losing ground to the euro.

Listing the Brexit-related effects, the national statistics office cited problems such as the stockpiling of goods in the first quarter, along with shutdowns by carmakers. But the bad news was widespread: Only the services sector returned a positive result, at 0.1% growth. The biggest loss came in production, which shrank by 1.4% in the quarter. Within that sector, manufacturing fell by 2.3%.

Despite the downturn, Chancellor of the Exchequer Sajid Javid told the BBC that he believes the U.K. isn't heading for a recession. In a tweet, Javid said the economy "remains strong and resilient." He also listed positive economic data, from the U.K.'s low unemployment rate and wage growth to predictions that the country will resume an economic expansion.

U.K. Prime Minister Boris Johnson has promised to yank Britain out of the EU by the Oct. 31 deadline whether the two sides have reached an exit deal or not. And after two weeks in his new job, Johnson has not backed off that plan. On Friday, Johnson sent a letter to the government's civil servants, telling them to make preparations for a no-deal Brexit their top priority, according to Sky News.

Essentially since Brexit was approved, economists have warned of disastrous effects if Britain opts to leave the EU without a trade deal in place. And those warnings have only grown this summer, after it became clear Johnson would replace Theresa May in late July.

"I think if he leaves without a deal, the pound is going to crash further," Stanford University economics professor Nicholas Bloom told NPR last month. "We'll probably see a recession. You know, unemployment will shoot up. It is genuinely really scary."

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