Britain halfway to recession as economy contracts pre-Brexit

The British economy shrank last quarter for the first time since 2012, dragged down by a slump in manufacturing just as Prime Minister Boris Johnson prepares to leave the European Union with or without a divorce deal.

In the most startling economic warning sign since the 2016 Brexit referendum, gross domestic product stood at -0.2 percent for the three months leading to June, compared with the previous quarter.

Two successive quarter-years of negative growth is the official definition of a recession.

“Two weeks into Boris Johnson’s hard Brexit government and we are now officially halfway towards a recession,” Labour MP David Lammy tweeted.

“Struggling families, schools, hospitals and other vital services will suffer unless we change course.” 

Chancellor Sajid Javid tried to put the figures in a positive light: “This is a challenging period across the global economy, with growth slowing in many countries. But the fundamentals of the British economy are strong – wages are growing, employment is at a record high and we’re forecast to grow faster than Germany, Italy and Japan this year.”

But with output in the eurozone growing by 0.2 percent in this past quarter, experts are not so sure. PwC senior economist Mike Jakeman said Britain’s economy was “stalling”, with the Brexit crisis and the uncertain global outlook leaving the economy on a “knife-edge” for the third quarter. 

Brexit has yet to happen

Many car factories ramped up manufacturing at the start of the year and brought forward production breaks to prepare for Britain’s original Brexit date of March 29, but the divorce was delayed by then-Prime Minister Theresa May.

“Manufacturing output fell back after a strong start to the year, with production brought forward ahead of the UK’s original departure date from the EU,” ONS statistician Rob Kent-Smith said.

On winning the top job last month, Johnson set up a showdown with the EU by vowing to negotiate a new withdrawal deal, despite the dual challenges of the time available, and the EU’s outright refusal to reopen the agreement they had already negotiated with the British government.

Johnson has threatened that, if the bloc refused to start again on the deal, he would take Britain out on October 31 without any deal – something which many economists and investors say would send shock waves through the world economy, tip Britain into a recession, roil financial markets and weaken London’s position as the pre-eminent international financial centre.

“The government is determined to provide certainty to people and businesses on Brexit,” said Javid. “That’s why we are clear that the UK is leaving the EU on October 31.”

Liberal Democrats Treasury and business spokesman Chuka Umunna tweeted: “This is the damage Boris Johnson and his Vote Leave government are doing to our economy – UK jobs and livelihoods sacrificed at the altar of political extremism. A complete and utter disgrace – the sooner they are booted out of office, the better.”

Alarm bells

Year-on-year economic growth slid to 1.2 percent from 1.8 percent in the first quarter, Britain’s Office for National Statistics said, its weakest level since the start of 2018. Annual growth in June alone was the weakest since August 2013 at 1.0 percent.

The economic alarm bells are ringing just as the trade battle between the United States and China unsettles the world economy.

The Bank of England, in its August inflation report last week, predicted that growth would be limited in the current quarter to 0.3 percent, and that growth for the year as a whole would drop to 1.3 percent.

June manufacturing data was also unexpectedly poor and output for the quarter contracted at the fastest rate since early 2009, when Britain was mired in recession.

Private-sector business surveys have shown the manufacturing and construction sectors both contracted in July, while the larger services sector eked out only modest growth.

Britain’s economy has slowed since June 2016’s vote to leave the EU, with annual growth rates dropping from more than two percent before the referendum to 1.4 percent last year.

Ever since the 2016 EU referendum, the pound has gyrated to the rhetoric of the Brexit divorce: After the result was announced, it had the biggest one-day fall since the era of free-floating exchange rates was introduced in the early 1970s.

The finance minister-in-waiting for the opposition Labour Party, John McDonnell, said: “The Tories’ Brexit bungling, including Boris Johnson now taking us towards no-deal, is breaking the economy.”

“It’s time for an end to this incompetence from successive Conservative governments – we need a general election and a Labour government to turn this country around.”