Snapshot - Economics

Will the UK economy slip into recession?

Disappointing GDP data shows the UK economy contracted in the second quarter and raises the risk of the country entering a technical recession.

09/08/2019

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

The UK economy contracted by 0.2% in the second quarter, following 0.5% growth at the start of the year.

What was behind the data?

A sharp drop in manufacturing output (-2.3%) over the quarter was the main driver of the decline, although the construction sector also contracted (-1.3%). The service sector managed to eke out 0.1% growth, though this was a three year low.

Within the expenditure breakdown, the biggest drag on growth over the quarter was a reduction in inventories which had been building for some quarters ahead of the initial March 2019 Brexit deadline. With the deadline now at the end of October, private and public institutions and individuals probably reduced their holdings of goods and materials etc.

Otherwise, household spending slowed compared to the previous three months, but remained robust, growing by 0.5% over the quarter. Total investment growth is contracting once again, while government spending remained elevated. The trade balance returned to a more normal level after a big distortion was caused by the potential import of non-monetary gold (by private individuals). This was the main cause of the record negative contribution from trade in the first quarter, and the strong positive contribution this quarter.

Is a recession looming?

Overall, these are clearly a disappointing set of figures which have significantly raised the likelihood of a technical recession – two consecutive quarter of negative growth.

Given the large destocking that has just occurred, we are unlikely to see a repeat in the third quarter. If anything, we will probably see another, even larger build-up of inventories in the run-up to October, especially as the government’s default strategy is to exit the EU without a deal if one cannot be reached. Restocking will probably be enough to avoid a recession for now, but the risks further out are building.

Important information

This communication is marketing material. The views and opinions contained herein are those of the named author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Investment Management Ltd (Schroders) does not warrant its completeness or accuracy.

The data has been sourced by Schroders and should be independently verified before further publication or use. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions.

Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.  Exchange rate changes may cause the value of any overseas investments to rise or fall.

Any sectors, securities, regions or countries shown above are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. Forecasts and assumptions may be affected by external economic or other factors.

Issued by Schroder Unit Trusts Limited, 1 London Wall Place, London EC2Y 5AU. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.