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UK CommentGDP contracts in Q2

  1. GDP fell 0.2 percent in Q2 vs. expectations (market and BoE) of zero growth
  2. Falling activity in IP and construction, marked deceleration in services growth
  3. Increased risk of no-deal Brexit will weigh on activity ahead
GDP fell 0.2 percent in Q2 vs. expectations (market and BoE) of zero growth
Preliminary data from the ONS show UK GDP growth contracted by 0.2 percent in Q2, missing the estimates of the market and the Bank of England (BoE) for zero growth. The y-o-y growth rate fell to 1.2 percent from 1.8 percent in Q1.
Falling activity in IP and construction, marked deceleration in services growth
GDP growth had temporarily been buoyed to 0.5 percent in Q1 thanks to some catch-up from past weakness. In addition, Brexit fears had led to hoarding and front-loading of production ahead of the original Brexit date of March 29. In Q2, output growth was burdened by falling output in both the industrial and construction sectors, while growth in the services sector eased markedly. According to the ONS, industrial production output fell by 1.4 percent in Q2, the largest decline since 2012, driven by a 2.3 percent fall in manufacturing output. Services output growth slowed to 0.1 percent, the weakest quarterly figure in three years. Construction output fell by 1.3 percent in Q2. On the demand side, private consumption and falling imports added to GDP growth, while exports, investments and inventories burdened.
Increased risk of no-deal Brexit will weigh on activity ahead
Sentiment measures, such as the PMI surveys, point to continued malaise and weak positive growth heading into Q3. The likelihood of a hard Brexit seems to have increased substantially lately, and Johnson’s administration currently expresses confidence it can deliver Brexit on October 31. We believe the Brexit uncertainty will stay elevated ahead, weighing on the UK economy in addition to global risks. The Bank of England will likely keep its policy unchanged while it waits for Brexit. If the Brexit deadline were to be extended, we believe the BoE would continue to keep monetary policy unchanged. However, in the case of a no-deal Brexit, we believe the BoE would cut the policy rate.

 




 



Disclaimer

Kari Due-Andresen

Chief Economist Norway

Norway and UK

kadu01@handelsbanken.no

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