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Brexit paralysis impacting business growth – and no-deal could mean recession

14 November 2018

Although third quarter GDP data was strong, the UK economy flat-lined in August and September, says Schroders senior European economist Azad Zangana, who expects a very weak end to 2018.

The UK economy grew in the third quarter by 0.6% quarter-on-quarter – its highest quarterly growth rate since the fourth quarter of 2016.

Household spending was the main driver of growth as consumption grew by 0.5% over the quarter. Net trade also made a positive contribution, along with government spending; however, the recession in business investment intensified as companies cut back investment by 1.2%, marking the third quarterly contraction in a row.

The third quarter release was always expected to be strong, as there was a sharp rise in activity and retail sales in July, which we believe was driven by the World Cup.

But monthly data has since disappointed, with activity flat in both August and September. The latest figures for September show that the services sector contracted slightly, though manufacturing and construction growth did improve.

The weakness in the latest monthly figures does not bode well for the rest of the year.

Leading indicators such as the Markit/HIS purchasing managers indices (PMIs) slowed sharply in November, suggesting further weakness ahead.

Concerns over Brexit are often cited as reasons for businesses to delay investment decisions. Although more recently, those delays are turning into cancellations, with almost daily announcements of manufacturing jobs losses and plant closures as firms shift production out of the UK.

We expect UK fourth quarter growth to be very weak as Brexit paralysis truly takes hold. Assuming the government can successfully negotiate the withdrawal agreement with Brussels and ratify it in Parliament, then we could see a rebound in growth early next year.

However, a failure to complete a deal which would mean a no-deal or cliff-edge Brexit, is likely to cause a further slowdown in activity, which could be enough to tip the UK into recession.

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