Monday 19 August 2019

David Chance: 'UK braces itself for a recession after shock plunge in economy'


British Prime Minister Boris Johnson. Photo: Julian Simmonds/Pool via REUTERS
British Prime Minister Boris Johnson. Photo: Julian Simmonds/Pool via REUTERS

David Chance

Britain is now firmly on recession watch after a surprise contraction in its economy in the second quarter, its first since 2012.

Most of the decline was down to an end to the stock building in the first quarter of the year that flattered earlier economic performance.

Many economists still expect a rebound in the third quarter of the year as car factories return to work and a combination of low unemployment and rising wages keeps consumer spending bubbling up.

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But the countdown to Brexit and a possible no-deal on October 31 means that the outlook both for the UK and Ireland still hangs in the balance.

The data released yesterday showed the UK economy contracted by 0.2pc and delivered a far weaker performance than expected. The fall came after a surprisingly strong first quarter that saw inventories build up ahead of the initial March 31 date for the UK to leave the European Union.

Yesterday's weak reading prompted yields on the UK's five-year gilts to fall below those of the two-year issue for the first time since 2008.

A fall in longer-term bond yields below those of shorter term is widely seen as an indication that a recession is coming.

Looking beneath the headlines of the second quarter numbers, household consumption in the UK rose by 0.5pc in the quarter after 0.6pc in the first, backed up by wages that are growing 3.4pc annually and an unemployment rate of just 3.8pc, well below the 7.5pc average in the eurozone.

"Brexit uncertainty, and to a lesser extent, weaker global demand, has reduced firms' appetite to expand," said James Smith, developed markets economist at investment bank ING, in response to the data.

A sharp drop in the value of the pound against the euro should already have started to hit exports from Ireland to the UK by making them more expensive.

There have been warnings from companies as varied as Ryanair and Kerry Group that Brexit would take a toll.

Ryanair said in its half-year earnings released that it would look at shutting routes such as London to Glasgow, Edinburgh and Belfast if there were a no-deal Brexit.

Kerry chief executive Edmond Scanlon said this week that Brexit meant that the UK market was "soft" and that he did not expect an upturn soon.

The company has spent €5m this year on Brexit preparations.

Glanbia, too, for whom the UK is a major market, said recently that it was stepping up its preparations. The company gets 3pc of its revenue from the UK and CEO Siobhán Talbot told the Irish Independent that the issue with Brexit was the "protracted nature of the uncertainty".

The first five months of export data from Ireland to Britain have seen sales rise by 9pc from a year ago, a gain of €486m, to a tad over €6bn, despite the lower value of sterling. However the impact may start to show up soon as the pound's decline has accelerated since then and it recently hit a two-year low against the euro.

One of the few areas where Brexit and the falling pound are having an impact is on new car registrations here, which are falling sharply, whereas the import of second hand cars from the UK is surging.

The main pathway for Brexit to infect the Irish economy will come from tariffs and trade barriers that may come into play after the UK leaves, rather than a direct large impact from falling growth in what is still a large market for exporters here, accounting for 12pc of overall merchandise sales overseas.

Those impacts likely won't be seen until next year, but under the worst-case scenario, the Central Bank of Ireland says that growth here could come in at just 0.7pc next year, down from 4.1pc if there is a Brexit deal with a transition period under which current trading rules would apply.

The National Treasury Management Agency noted that it was not a one-way street of gloom for Ireland from Brexit, as it could increase foreign investment here, while Irish firms could win market share in Europe at the expense of the UK.

Even with Brexit weighing on the economy, Britain's performance is not out of line with other major European economies as Germany too looks set for a second quarter contraction after data showed exports from the eurozone's largest economy fell 8pc in the 12 months to June.

London-based Capital Economics expects the British economy to avoid a technical recession this year, which is two quarters of declining gross domestic product.

"But how Q4 turns out is entirely dependent on whether there's a Brexit deal or not," said its UK economist Thomas Pugh.

Irish Independent

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