Foretaste of the Brexit economic brake

At first glance, the UK economy did not fare all that badly in 2018: the 1.3% year-on-year increase in fourth quarter economic output in the UK was much more substantial than in the EMU and its big member states. Against the background of the ongoing Brexit uncertainty, economic growth of 1.4% for the full-year 2018 is also quite respectable. However, British companies seem to have finally applied the emergency brakes in response to the increasingly confusing political developments in the British House of Commons. This is evident by the gross domestic product (GDP) data in December –now published on a monthly basis too – which recorded a sharp month-on-month decline of 0.4%.

The weak growth in the final month of 2018 prevailed across all sectors of the economy – for the first time since 2012. The UK industry declined for the fourth consecutive month. Manufacturing industry output has been contracting already for six months, while the construction industry has slowed down to a pace not seen for more than six years, having declined by 2.8% from November. Economic output in the services sector, which is so important for the UK, has also fallen slightly. This is especially so in consumer-related economic sectors such as retail or the gastronomy trade. Thanks to still relatively solid economic growth in October and November, the fourth quarter even recorded a rise of almost 0.2% over the previous quarter. However, government consumption was a key pillar of growth in the previous quarter, growing at a pace last seen six years ago. Inventories were also increased further. In contrast, investment activity contracted again and foreign trade made a negative contribution to growth.

Several weeks before the planned exit date, the Brexit burdens are gathering significant pace in the UK economy – a first “foretaste” is the weak economy in December. With UK politics failing to offer companies any prospects at present as to how the exit will proceed at the end of the current quarter, the uncertainty is likely to gather even more pace. Paradoxically, the fear of a no-deal Brexit also goes hand in hand with positive growth effects – such as stock accumulation by companies and consumers or the government’s investments in emergency plans. Nonetheless, with corporate investment likely to decline further and to an even greater extent, we believe the UK economy will at best stagnate in the current quarter. This is also indicated by the latest surveys from the services sector and of consumer spending.

Even though we are still not entirely convinced that UK politicians will not wilfully allow a no-deal Brexit to happen, there is a significant risk that a no-deal Brexit will actually occur, even if only “accidentally” owing to the ongoing blockade of the UK parliament. In any event, the fear that this worst case scenario might occur will continue to keep the economy in suspense for some time yet, possibly beyond 29 March if the exit date is deferred by a few weeks. We see this as being the more likely scenario. The UK economy looks set to embark on its weakest year in a decade as regards growth. We expect economic output to be well below average this year and the next, rising by only 1% in each of the two years.

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