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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

UK economy contracts in December as pre-Brexit slowdown bites - as it happened

An aerial view of London.
An aerial view of London. Photograph: Vladimir Zakharov/Getty Images

Full story: Manufacturing slump puts UK economy into reverse as Brexit looms

And finally, here’s our updated news story on the UK growth figures (see here for rolling coverage)

The British economy plunged into reverse in December, with a broad-based slump in economic output completing the weakest year for growth since 2012.

The Office for National Statistics said gross domestic product contracted by 0.4% from the previous month, fuelled by a fall in spending on the high street over the key festive shopping period.

With less than 50 days to go before Brexit, the figures showed all three drivers of growth in the British economy – services, production and construction – shrank during December.

The decline in monthly output helped drag down quarter-on-quarter growth to a rate of 0.2% in the three months to the end of the year, slightly below the Bank of England’s expectations and down from a rate of 0.6% in the third quarter.

Economists tend to focus on the three-month figures, as monthly GDP snapshots can be prone to revision, but the scale of the decline in December is likely to be seen as a sign of the economy losing momentum as Brexit draws nearer.

For 2018 as a whole, GDP growth slipped to its lowest since 2012, at 1.4%, down from 1.8% in 2017.

Here’s the full take:

That’s probably all for today. Thanks for reading and commenting. GW

Our economics editor Larry Elliott sees more bumps ahead for the UK economy:

In the meantime, the economy is going to struggle and growth could be even weaker in the first three months of 2019 than it was at the tail end of 2018 if consumers really go into their shells. A recession – two consecutive quarters of negative output – will probably be avoided with the help of higher government spending but it could be a close run thing.

Brexit is not the only factor holding back the economy. Global growth is slowing and there are some other EU countries, Germany and Italy for example, that did even worse in the second half of 2018. Pressure to avoid a no-deal Brexit will not be coming just from policy makers in the UK.

More here:

With British industry in recession, firms should have activated their Brexit contingency plans by now, argues Nicole Livesey, manufacturing partner at Pinsent Masons.

She explains:

Many will need to alter logistics and shipping routes, invest in warehousing of stock and adjust production schedules to protect their business. We may also see operations being relocated overseas as well as reduced worker headcount in the coming months.

“The manufacturing sector has warned Government for some time that a sharp slowdown would take hold in the wake of Brexit. Given we are just 46 days away from 29th March businesses need to take action to safeguard against the impact of a no-deal.”

Here’s a timely reminder that the eurozone is also slowing:

The latest UK trade figures have brought little cheer. Britain’s trade gap with the rest of the world has widened in the last quarter as it bought more goods - including cars - from the EU.

Imports from EU countries increased by £1.7bn in October-December, while exports increased by just £0.04bn.

The rise in imports was due mainly to a £1.5bn increase in imports of machinery and transport equipment, of which £1bn was cars.

UK trade data

Here’s the key points from the ONS:

  • The total trade deficit (goods and services) widened £0.9 billion to £10.4 billion in the three months to December 2018, due mainly to a £1.5 billion rise in goods imports.
  • Rising imports of cars, material manufactures and chemicals were the main contributors to the rise in goods imports in the three months to December 2018; this was offset in part by falling imports of unspecified goods (including non-monetary gold) and fuels.
  • The trade in goods deficit widened £1.6 billion with EU countries and narrowed £0.2 billion with non-EU countries in the three months to December 2018.
  • Excluding erratic commodities, the total trade deficit widened £3.8 billion to £12.9 billion in the three months to December 2018.
  • Removing the effect of inflation, the total trade deficit widened £0.6 billion to £7.1 billion in the three months to December 2018.
  • The total trade deficit widened £8.4 billion to £32.3 billion between 2017 and 2018, due mainly to a £7.2 billion increase in services imports.

Hammond: Brexit uncertainty is casting a shadow

Chancellor Philip Hammond
Chancellor Philip Hammond Photograph: Sky News

Sky News have broadcast an interview with Philip Hammond, in which the chancellor warns that the failure to agree a Brexit deal is hurting the economy.

Asked about the slowdown in growth to just 0.2% in the last quarter, Hammond replies:

It’s a solid performance from the economy when you took at what’s happening globally and in other competitor countries.

But of course there is no doubt that our economy is being overshadowed by the uncertainty created by the Brexit process.

The sooner we can resolve that the better, and the quicker we can get back to more robust growth in the future.

Hammond (a former Remain supporter who now favours a softer Brexit) also admitted that he’s expected an agreement to be signed by now.

I’m afraid this has gone on longer than we would have liked.

We would have liked to have been able to bank this at the back end of last year, but I’m confident that we will get it done, and that’s the important thing that business needs to hear.

Updated

Professor Costas Milas of Liverpool University says today’s UK GDP figures are bad, and also worse than the Bank of England predicted in its Inflation Report last week (when it also estimated a one-in-four chance of a recession in 2019).

He tells us:

Indeed, the Bank’s forecasts assumed annual growth of 1.36% as the most likely outcome for 2018 Q4. Today’s ONS data readings suggest even lower annual growth at 1.3% for 2018 Q4 and a GDP contraction of 0.4% in December.

Quite worryingly, the “carry over” effects of the above readings indicate that the risk of recession has risen... Will politicians take (any) notice?

Liam Fox: China slowdown to blame

British Secretary of State for International Trade Liam Fox (left), with Swiss Federal Councillor Guy Parmelin, right, today
British Secretary of State for International Trade Liam Fox (left), with Swiss Federal Councillor Guy Parmelin, right, today Photograph: Peter Klaunzer/AP

UK trade secretary, Dr Liam Fox, has blamed China’s cooling economy for Britain’s weak growth, rather than Brexit.

Speaking in Bern this morning, Fox said:

“Clearly there are those who believe that Brexit is the only economic factor applying to the UK economy.

I think you’ll find that the predicted slowdown in a number of European economies is not disconnected from the slowdown, for example, in China”.

He saw speaking after signing a trade continuity agreement to guarantee future trading terms between the UK and Switzerland after Brexit.

Here’s another neat chart from Rupert, putting the UK slowdown in context:

UK service companies, builders and manufacturers all had a relatively tough 2018, with growth the weakest in at least five years.

The ONS says:

Headline annual gross domestic product (GDP) growth was 1.4% in 2018, the lowest it has been in six years.

Meanwhile, the services sector had annual growth of 1.7%, the lowest since 2011 and the production sector had annual growth of 0.7%, the lowest since 2013. Construction annual growth was 0.6%, the lowest since 2012

Why falling business expenditure is a worry

When company bosses are nervous about the future, they stop buying new machinery and put off expanding into new premises.

That makes business expenditure a good measure of the underlying health of the economy, as (used wisely) it should deliver faster growth and higher productivity.

So the recent slide in business spending is a concern; these charts from economist Rupert Seggins shows the scale of the deterioration:

Yael Selfin, chief economist at KPMG UK, is also concerned, saying:

“It is particularly worrying to see business investment contracting significantly again, as it will impact the UK’s longer term productive capacity as well as productivity performance, and points at a low vote of confidence from business in the UK’s future. The contraction in manufacturing, despite the relatively weak pound and while the UK economy is still enjoying the benefits of the EU trade framework is also a worry for what to come.

“As on many other occasions, the economy was bolstered by households who continued to spend, albeit more reluctantly, and by a pick-up in government spending, which will not be sustainable in the long run. We need to see a recovery in business confidence and investment to get the UK economy moving again.”

You can see the UK GDP report online, here.

UK GDP by quarter

While quarterly GDP data are volatile (and monthly even more so), the long-term picture of UK growth is clear:

Economist Sam Tombs is hopeful that Britain will avoid a recession this year:

Hammond takes upbeat view of slowdown

Chancellor Philip Hammond has pointed out that the UK economy “continues to grow”, overlooking the fact it did quite the opposite in December.

Ben Brettell, senior economist at Hargreaves Lansdown, says the UK economy was buffeted by problems at home and overseas:

There’s little doubt Brexit uncertainty is responsible for the disappointing numbers, though concerns over global trade will also have played a part.

Business investment – the most Brexit-sensitive element of GDP - dropped 3.7% Q4 against a year earlier, the biggest fall since early 2010.

The UK isn’t the only country that struggled to post strong growth in the last quarter of 2018.

Italy’s economy shrank by 0.2%, putting the eurozone’s third-largest member into recession.

France did better, expanding by 0.3% despite the disruption caused by the gilet jaune protests.

The wider European Union grew by 0.3%, while the eurozone only managed 0.2%.

Germany’s GDP data is due on Thursday; it’s expected to show growth of just 0.1%, following a small contraction in the summer.

We’re also waiting for US GDP, which has been delayed by the Federal shutdown. It’s likely to show growth of around 0.6% for the quarter.

Brexit uncertainty blamed for slowdown

Several economists are blaming uncertainty about Britain’s exit from the EU for the sharp slowdown in UK growth in the last quarter, to just 0.2%.

Tej Parikh, Senior Economist at the Institute of Directors, explains:

“The UK economy lost its summer exuberance in the final months of 2018, and there are signs of further chill winds ahead.

“The ongoing uncertainty around what happens after 29th March is the prime suspect behind sapped economic activity. There is currently a drag on growth as some businesses are forced to hold back on major investments and engage in cautionary stockpiling.

“The first half of 2019 will bring further challenges for the UK economy. China’s slowdown and weak growth in Europe are likely to bite at British exporters. At the same time, while consumers have shown resilience so far, many are becoming increasingly cautious with their wallets.

“The clock is ticking, but if a Brexit deal can be agreed, things should start to look sunnier as pent-up demand is released and firms begin investing again.”

James Smith, economist at ING, is also disappointed by the drop in business investment:

It was back to reality for the UK economy during the fourth quarter, according to the latest GDP figures. Growth slowed to just 0.2%, a stark contrast to the 0.6% reading seen during the third quarter when warmer weather gave the economy a temporary reprieve.

But the most alarming feature of these numbers is that fact that business investment fell for the fourth quarter in a row, as Brexit uncertainty continued to bite.

This is from Morten Lund, analyst at Nordea Markets:

UK manufacturing in recession

In another blow, today’s GDP report shows that UK manufacturing has now contracted for six months in a row.

That means it’s in recession (defined as two consecutive quarters of negative growth) for the first time since the financial crisis.

Manufacturing output has been falling for months
Manufacturing output has been falling for months Photograph: ONS

The ONS says:

Production fell by 0.5% in the month of December 2018, also driven by manufacturing, which contracted by 0.7%.

This is the sixth consecutive monthly fall for manufacturing, which last occurred between September 2008 and February 2009.

Economist Andrew Sentance blames Brexit uncertainty for the slowdown:

Here’s a neat summary of the key points in the GDP report, via Bloomberg:

  • Consumer spending growth stayed at 0.4% in the fourth quarter but business investment slumped 1.4%, the most since the start of 2016. Services, the largest part of economy, slowed to 0.4% growth.
  • In December, all the main sectors of the economy shrank, with manufacturing falling for a sixth consecutive month, the longest run of declines since the financial crisis. The fall in overall GDP was the largest since March 2016.
  • The trade deficit narrowed to £12.1bn in value terms in December.
  • Growth in 2018 slowed to 1.4%
  • GDP rose 1.3% in the fourth quarter from a year earlier, the weakest since the second quarter of 2012.

Annual growth hits six-year low

The annual growth figures also paint a worrying picture.

The UK economy only expanded by 1.4% in 2018, the weakest performance since 2012.

UK GDP

UK carmakers and steel producers had a particularly bad quarter, says Rob Kent-Smith, head of GDP at the ONS:

“GDP slowed in the last three months of the year with the manufacturing of cars and steel products seeing steep falls and construction also declining. However, services continued to grow with the health sector, management consultants and IT all doing well.

“Declines were seen across the economy in December, but single month data can be volatile meaning quarterly figures often give a better indication of the health of the economy.

“The UK’s trade deficit widened slightly in the last three months of the year, while business investment again declined, now for the fourth quarter in a row.”

Britain’s services sector provided the bulk of the growth in the final three months of 2018.

Services output expanded by 0.4% in October-December, while manufacturing output shrank by 0.9% in the quarter.

And in December alone, services, manufacturing and construction ALL contracted, as this chart shows:

UK GDP report in detail
UK GDP report in detail Photograph: ONS

UK GDP fell 0.4% in December

In another blow, the UK economy actually shrank in December.

The Office for National Statistics reports that GDP shrank by 0.4% in the final month of 2018. That’s worse than expected -- economists had predicted that the economy might have flatlined during the month.

This will intensify fears that Britain’s economy is suffering from Brexit anxiety, the trade war between the US and China, and weakness in the eurozone (where Italy has fallen into recession) and beyond.

Updated

UK GDP report released

Newsflash: The UK economy suffered a sharp slowdown in the last quarter of 2018, only expanding by 0.2%.

That’s down from 0.6% in the third quarter.

More to follow...

There’s just time for a reminder of GDP’s weaknesses, with this brilliant speech by Robert Kennedy more than 50 years ago:

Household incomes takes £1,500 hit since EU referendum

Resolution, the thinktank, has a grim statistic -- UK households are £1,500 worse off, on average, today than was expected before the 2016 EU referendum.

That’s because growth has slowed, while the drop in the pound drove inflation up - eating into incomes.

According to Resolution, the UK having experienced the sharpest income growth slowdown of any advanced economy.

James Smith, Research Director at the Resolution Foundation, says:

“Two and a half years since the UK voted to leave the European Union, the country’s post-Brexit position remains far from clear. There has been much discussion about the impact of this uncertainty on businesses, but not enough about its effect on household incomes.

“The UK’s stark under-performance on income growth since 2016 – which has tailed off more than other advanced economies – has left UK households taking a £1,500 hit to their living standards.

“As we approach ‘Brexit day’ on 29 March, politicians in all parties needs to recognise how much is at stake for family living standards and that how the country goes forward, not just where it is heading, matters for household incomes in the here and now.”

Director Torsten Bell has tweeted about the report too:

The pound is coming under a little pressure this morning, dipping by a third of a cent against the US dollar to $1.291.

That suggests traders expect an underwhelming GDP report this morning - weak growth lowers the chances of an early interest rate rise.

Brexit worries are also pushing sterling down, after Theresa May rejected the Labour Party’s suggestion that the UK joins a permanent customs union with the EU.

Today’s growth report is expected show that businesses reined in their spending, as they nervously watch the Brexit negotiations play out.

Paul Donovan of UBS Wealth Management suspects consumers will be less perturbed (plus, any Brexit panic stockpiling will boost GDP):

The UK is doing a data dump – production, trade and GDP numbers are all due. The economy may have slowed slightly in the fourth quarter. Overall consumers are resilient in the face of political nonsense, by taking the sensible approach of not caring.

Companies are, however, inclined to delay investment.

We already know that growth in 2018 was choppy -- bad wintery weather got the year off to a bad start, before a blissful summer (and some sparking football results) cheered spirits.

UK GDP figures

Michael Hewson of CMC Markets explains:

After the strength seen in the middle of last year the UK economy softened somewhat heading into the final quarter. A lot of the strength seen in Q2 and Q3 was a consequence of a weak Q1 as a result of the so called “Beast from the East” which paralysed most of the country into March.

The resultant rebound was as much to do with that as a Royal Wedding, a hot summer, and a decent summer of sport culminating in a decent Football World Cup run for England.

How bad could the slowdown be?

Suren Thiru, head of economics at the British Chambers of Commerce, fears the UK economy might only have expanded by 0.2% in the last quarter...

It's UK GDP Day

Good morning.

Gross Domestic Product isn’t a perfect measure. And that’s no wonder -- how can a single number sum up everything, good and bad, that happens in an economy?

GDP can’t distinguish between activity that’s actively harmful, and that which makes our lives better. It struggles to cope with the internet, isn’t great at measuring improvements in services, and can’t cope with unpaid work at all.

But despite these flaws, GDP is the ‘go-to’ measure for policymakers who want to know how their economy is faring. And today, Britain’s economy is in the spotlight.

GDP figures for the fourth quarter of 2018, due at 9.30am, are expected to show a sharp slowdown. Economists predict that the economy only grew by around 0.3% in October-December, just half as fast as the 0.6% recorded during the heatwave of July-September.

Philip Shaw, chief economist at Investec, predicts that the economy may not have grown in December at all.

“Putting the pieces together, we are forecasting GDP to have remained unchanged in December, although it is possible that we see a very small gain,” he said. “This results in a 0.3% rise [for the fourth quarter].

“We will look closely at business investment – the area which we consider to be the most affected by Brexit worries – and specifically to see if it recorded its fourth consecutive quarterly decline in the fourth quarter.”

Here’s Angela Monaghan’s preview:

Such muted growth would reinforce concerns that the UK, and the wider global economy, is weakening. Brexit, the US-China trade wars, and political tensions in the eurozone will all be blamed.

Today’s report will show how manufacturing, services and construction all fared in the last quarter. The Office for National Statistics will also report new trade figures, giving a decent picture of the health of the economy as we prepare for Brexit.

The agenda

  • 9.30am GMT: UK GDP report for Q4 2018 released
  • 9.30am GMT: UK trade balance for December

Updated

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