Pound hits two-year low after UK economy contracts in second quarter – as it happened

Jasper Jolly

from on 2019-08-09 14:28 (#4MY3K)

GDP shrank by 0.2% in the second quarter amid manufacturing slump

3.28pm BST

So it's official: the UK economy contracted by 0.2% in the second quarter - a worse performance than stagnation predicted on average by economists beforehand.

Sterling hit new two-year lows against the US dollar on Friday because of the shock, and economists' attention is turning now to whether the UK is currently in recession.

The next two quarters are likely to be marked by significant uncertainty over Brexit, and this slow rate of growth makes it more likely that the UK will enter a recession, especially in the event of a no-deal exit from the EU on 31 October.

The persistent threat of a hard Brexit since June 2016 has weighed heavily on the risk appetite of UK businesses. Unsurprisingly, investment has fared badly.

#NIESR quarterly #UK #GDP tracker puts growth around 0.2% quarter-on-quarter in third quarter following 0.2% q/q contraction in Q2. We currently expect Q3 growth of 0.3% q/q assuming that some renewed stockbuilding starts during the quarter ahead of 31 October #Brexit deadline https://t.co/VBhcEwLtif

If the need arrives, the next Bank of England governor has to be able to say truth to power, especially when it comes to issues surrounding financial stability and if, like 1976, there is a run on sterling.

New elections are now a base case. Markets were not blindsided and have been increasingly pricing election risk, but this is still a step change.

The threat of fresh elections will worry markets, but significant widening should be contained by quantitative easing expectations as markets weigh-up the additional political uncertainty against the prospect of the end of this almost-worst-case government.

3.27pm BST

Sky News reports that the government has agreed to provide financial support to British Steel potentially worth 300m in a bid to secure its future.

Ministers at the business department have signed off on a deal that will allow Ataer, a subsidiary of the Turkish military pension fund, a formal period of exclusivity for its offer of about 70m, Sky reported.

2.50pm BST

Just in on British Steel: a mystery bidder claims to have entered the fray to buy British Steel, days before a vehicle owned by the Turkish military pension fund was expected to enter exclusive talks with the government.

Sources familiar with the potential buyer said it was a consortium of British and west African investors with ties to the construction industry.

2.42pm BST

The world's demand for oil is growing at the slowest rate since the financial crisis over fears of a global economic slowdown, the International Energy Agency (IEA) said.

2.34pm BST

Shares on Wall Street have fallen at the opening bell in New York.

The Nasdaq lost 0.5% in early trade, while the S&P 500 lost 0.3% and the Dow Jones industrial average dipped by 0.2%.

2.08pm BST

Here's some more on the FTSE 100's largest riser, WPP. Shares are up by 7.5%.

1.44pm BST

There is a "significant risk" of the UK falling into recession when figures come out in November, according to the influential National Institute of Economic and Social Research (Niesr).

Their forecasts, based on the latest data, suggest that the economy will grow in the the July-September period by 0.2% - meaning the economy would be flat in the middle of the year, not in recession.

Economic growth in the United Kingdom was negative in the second quarter of 2019 and is set to remain weak in the third quarter in the face of a global slowdown and continuing Brexit-related uncertainty.

Our latest estimate implies that there is a significant risk that the economy is already in a recession that began in April, and the clear possibility of a more material downturn should there be a no-deal Brexit.

Our #NIESRGDP Tracker is out- UK economic #growth grinds to a halt as #Brexit #uncertainty and a global slowdown bite - read our analysis here:https://t.co/AwAQZ2uysn

1.33pm BST

Summer is cancelled - at least, it is if you happen to be a special adviser to Boris Johnson's government.

Johnson's chief of staff cancelled all leave for government advisers until 31 October in a missive on Thursday night, raising further speculation the government is planning for a forced snap election in the aftermath of the UK leaving the EU with no deal.

There is serious work to be done between now and October 31st and we should be focused on the job.

1.00pm BST

Historic shipyard Harland and Wolff ceased trading on Monday. The Guardian's Rory Carroll has spoken to workers at the site where Titanic was built.

12.40pm BST

Bayer shares are up by more than 3% after a report that the German company has proposed to pay up to $8bn (6.6bn) to settle more than 18,000 US lawsuits related to its weedkiller Roundup.

12.22pm BST

Losses for the pound are gaining momentum as the US wakes up.

The new low for today against the US dollar is $1.2061. The next low point is a fair way down, at $1.1979.

12.11pm BST

Holidaymakers are always in the firing line of downward currency moves so imagine the feeling if your whole business relies on buying services abroad.

With the increased likelihood of a no-deal Brexit, sterling has significantly devalued.

This [...] leads to a significant increase in On The Beach prices versus full-risk competitors with currency hedges.

12.00pm BST

Chancellor Sajid Javid has been talking to the BBC in the aftermath of the GDP figures. He said:

No one will be surprised by today's figures [...] The important thing is that the fundamentals of the economy remain strong.

11.51am BST

The sterling sell-off on currency markets has steepened: the pound is now below $1.21 against the US dollar and below a1.08 against the euro.

That represents a daily decline of 0.5% against the euro, and 0.3% against the dollar: lows of a1.0784 and $1.2078 respectively.

11.44am BST

Thank you to Carlito1996 in the comments for dredging this link up from way back in the mists of time - 21 June 2016, just before the Brexit referendum: Boris Johnson promising to apologise if a Brexit vote led to a recession.

Two major caveats: the original question was slightly imprecise, so the new prime minister may have been referring to forecasts of an immediate recession following a vote in favour of leaving. And the UK has not reached recession, and many economists do not expect it to.

Of course I will [...] I'm not certain what my political career holds anyway. This is far more important than any individual political career.

10.55am BST

Meanwhile, Facebook is reportedly in talks with news publishers to offer "millions of dollars" for the rights to publish their material on its site.

The move follows years of criticism over its growing monopolization of online advertising to the detriment of the struggling news industry.

10.52am BST

A small diversion away from the UK GDP figures to a story from earlier this morning: the crisis caused by the 1MDB at the Goldman Sachs has deepened, with new charges against the US investment bank and bosses.

10.43am BST

A spectre is haunting the UK - the spectre of recession.

However, Capital Economics - admittedly among the more bullish forecasters in the City - predicts that the third quarter will be stronger in part because of the rearranged car manufacturing calendar we noted earlier.

The PMIs have been pretty dire so far, but the fact that many car manufacturers will be working in August when they are normally closed will probably add about 0.2 percentage points to quarter-on-quarter GDP growth in the third quarter. As such, we think the economy will grow in the third quarter, which would mean that the UK economy avoids a recession.

But how the fourth quarter turns out is entirely dependent on whether there's a Brexit deal or no deal.

The 0.2% q/q contraction in #GDP in Q2 was weaker than the stagnation most predicted. But almost all the weakness was due to the drag from "net" stock building. And car manufacturers will be working in August when they are normally closed. We expect GDP growth to pick up in Q3. pic.twitter.com/RsJzkPaclF

10.29am BST

We won't know if the UK is in recession until 11 November, after the 31 October Brexit date.

Is it possible that a governing party could go into a snap election after that point with a "recession" label stamped across it?

That election will have to be very very early in November.

Q3 GDP first estimate is 11 November, and there must now be a high possibility of it marking the UK entering recession.

Wonder is that on the campaign grid? https://t.co/pmp3im3MRI

10.24am BST

It's the first GDP data on the watch of Sajid Javid as chancellor - and quite a welcome.

This is a challenging period across the global economy, with growth slowing in many countries. But the fundamentals of the British economy are strong - wages are growing, employment is at a record high and we're forecast to grow faster than Germany, Italy and Japan this year.

The government is determined to provide certainty to people and businesses on Brexit - that's why we are clear that the UK is leaving the EU on 31 October.

10.17am BST

Here is the long-term view of the GDP figures. As you can see it's the joint worst since 2009, when the UK economy nose-dived following the banking crash.

It's clear from our business surveys that underlying momentum remains lukewarm, choked by a combination of slower global growth and Brexit uncertainty. As a result, business sentiment is dire.

Securing a Brexit deal before the October 31 deadline is the first step to revving up the economy. The second is re-focusing attention on vital domestic priorities - such as pressing ahead with key infrastructure projects - to boost productivity and growth potential over the longer-term.

10.09am BST

The business and economics community has been taken by surprise by the extent of the weakness in the British economy in the second quarter.

Tej Parikh, chief economist at the Institute of Directors, said:

Contraction in the second quarter is a rude awakening after the growth in the first three months of the year, and confirmation of the concerns businesses have been expressing about the economy.

With the nature of the UK's exit from the EU looking likely to be determined at the eleventh hour, the economy is facing a bumpy ride going into the third quarter. Another round of stockpiling is complicated by preparations for Christmas and by firms' previous experience of spending money to no avail.

10.04am BST

As expected, the manufacturing sector has borne the brunt of the economic weakness - in the main because carmakers pulled forward planned shutdown periods.

It's the worst manufacturing performance since the financial crisis. Manufacturing growth saw the biggest rolling three-month fall since April 2009, at negative 2.3%.

9.48am BST

The FTSE 100 is now down by 0.26%, while the FTSE 250 (which is generally considered to be more exposed to the UK economy) has reversed earlier gains to trade marginally down for the day.

Sterling is holding lower at just over a1.08 against the euro and $1.21 against the US dollar.

9.47am BST

The UK economy contracted, but it is not technically in a recession: a recession is generally considered to be two consecutive quarters of lower GDP.

Nevertheless it is "grim viewing", said David Cheetham, chief market analyst at online trading firm XTB.

This marks the first time in over six years that we've had a quarterly contraction in economic activity and given the growing threat of a no-deal Brexit that looms menacingly overhead, it would not be at all surprising if the current quarter also shows a contraction - therefore meeting the standard definition of a recession with consecutive drops in quarterly GDP.

The solid 1st quarter growth of 0.5% owes a lot to companies stockpiling ahead of the 29th March Brexit deadline that never came and it's pretty obvious that economic activity is clearly slowing.

9.43am BST

It was the worst performance in six and a half years, as growth was held back by Brexit uncertainty and car factory shutdowns.

The ONS data showed that all three main sectors of the economy - services, manufacturing and construction - struggled in the three months to June.

9.42am BST

The last time UK economic growth was slower was 2009, the depths of the financial crisis.

Nancy Curtin, chief investment officer of Close Brothers Asset Management, said:

There's no denying that the UK's GDP figures are a cause for concern. However, the jury's still out on the extent of inventory built-up. We are likely to see a similar phenomenon ahead of October, as firms look to mitigate supply chain disruption in the case of a no-deal Brexit, which may provide short-term support for GDP.

On the whole though, there's no doubt the UK is struggling. The services and automotive sectors have decelerated, construction and manufacturing have declined, and business activity has stalled. The impact of Brexit is no doubt exacerbated by the wider global slowdown. The MPC has already warned on Britain's growth forecasts, and a rate cut this side of Christmas is looking ever more likely under in a "no deal" Brexit scenario. On the bright side, the Prime Minister's plans for 'boosterism' - government spending to support the UK economy - could serve as a counterbalance to recent stagnation. With uncertainty over Brexit still high, however, the outcome for growth remains uncertain.

9.36am BST

Sterling has fallen against the US dollar and the euro in the aftermath of the GDP figures.

The pound is now down by 0.3% against the euro and 0.25% against the US dollar, after UK economic growth came in significantly lower than expected.

9.30am BST

The UK economy shrank by 0.2% in the second quarter, according to the Office for National Statistics.

9.21am BST

Sterling is slightly weaker against the US dollar and the euro on Friday morning, after a brutal fortnight under the new prime minister, Boris Johnson.

His determination to leave the EU on 31 October - "do or die", whether the EU backs down on the backstop (the insurance policy preventing a hard border between the UK and Ireland) or not - has left the pound at about $1.21 against the US dollar, around the lowest levels in two years.

The downside risk for the pound is for a contraction in growth, which would likely spur headlines about a possible recession.

If the Conservative party does manage to deliver Brexit, it would make sense for them to capitalise on this "victory", regardless of the means by which it was achieved, before whatever material negative consequences manifest and give the Labour party a stronger platform to campaign on.

9.08am BST

In the UK the economy is suffering from its own stockpiling hangover. Building up piles of products causes a boost in the short term, but in reality it just changes the timing of spending.

So in the first three months of the year the economy grew by 0.5% quarter-on-quarter, but many economists expect that was merely dragging activity forward.

8.46am BST

Some more on that German trade data (before we lead up to the GDP figures in about 45 minutes).

The trade data gave an end to a "disappointing second quarter", ahead of the first GDP estimate, said Carsten Brzeski, chief economist at ING Germany. A small contraction is now more likely, he said, after exports dropped in June.

What is hurting German exports currently, is the uncertainty, which has spread across the globe and has also paralysed many European economies.

Brexit also plays a role for German exports. In the run-up to the March deadline, German exporters benefited significantly from UK stockpiling. Now, they are suffering from the hangover of the stockpiling party. In April and May, German exporters sold almost as much to Austria as to the UK.

8.32am BST

WPP is the biggest riser on the on the FTSE 100, up by 7% today after it reported better than expected results.

Boss Mark Read has launched a three-year plan to put the business back on track, after it lost clients following the departure of Martin Sorrell, who turned it into a FTSE 100 company.

WPP reported a better-than-expected organic sales performance in the second quarter as its new strategy under boss Mark Read helped the world's biggest advertising group to win new business and retain clients.

The British company said on Friday organic growth less pass-through costs, its key sales measurement, dropped by 1.4% in the second quarter, an improvement on the first three months of down 2.8% and against a consensus of down 3%.

8.13am BST

The FTSE 100 in London has lost 0.2%, while the mid-cap FTSE 250 rose by 0.3%.

Germany's Dax index fell 0.4% at the open.

8.08am BST

Italy's main stock market index in Milan has slumped after deputy prime minister Matteo Salvini called for new elections that would finally end the fragile coalition between his League and the Five Star Movement.

7.59am BST

Good morning and welcome to our rolling coverage of business, markets and economics in the UK and the Eurozone.

And welcome to GDP day in the UK.

The UK economy probably failed to grow for the first time since 2012 - that's what economists say ahead of today's GDP publication https://t.co/yJXjgEJ6VZ via @Edspencive #tictocnews pic.twitter.com/zHI6T5Dxkf

The needlessly prolonged #Brexit uncertainty is obviously a key factor behind the deceleration / Q2 weakness. But this will also be payback for activity brought forward to Q1 and other preparations (esp. #auto shutdowns) in case of a disorderly #nodeal on 31st March... (2/4)

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