U.K. Economy Wilts as Brexit Jitters Hit Business Investment – Bloomberg


Brexit uncertainty dragged U.K. investment to its worst slump since the financial crisis, leaving the economy with barely any momentum.

Gross domestic product increased a smaller-than-forecast 0.2 percent in the fourth quarter, while December alone saw the economy shrink by 0.4 percent, the most since before the 2016 vote to leave the European Union. The pound fell 0.4 percent to $1.2897 as of 10:36 a.m. in London.

U.K. economic growth slowed at the end of 2018

The slowdown came as businesses cut investment for a fourth consecutive quarter, the longest continuous decline since the financial crisis.

The fear gripping business was illustrated this month when Japanese carmaker Nissan scrapped plans to build a new model in Sunderland. Airbus, which makes wings for commercial aircraft in Britain, has also threatened to switch investment elsewhere. Business investment fell 0.9 percent in 2018.

The U.K. is due to leave the European Union in a little over six weeks, and politicians are yet to agree on an exit deal. With businesses demanding clarity, and Bank of England Governor Mark Carney warning of damage from the “fog of Brexit,” Monday’s report underlines that that the political wrangling in Westminster comes at a real cost.

The economy is facing the worst year for growth since 2009, with economists warning of a recession if Britain leaves the EU without a deal to smooth the transition. The BOE sees growth of 0.2 percent this quarter, but the sudden loss of momentum at the end to 2018 suggests the economy could stagnate, as indicated in recent purchasing manager surveys.

Investment Freeze

Firms are putting projects on hold due to heightened fears of a no-deal Brexit

Source: Office for National Statistics

Still, there was no widespread evidence of stockpiling as the prospect of a no-deal Brexit looms larger, with inventories rising just 1.6 billion pounds ($2 billion) in the quarter. Organizations such as Heathrow airport and Unilever have said they are keeping more on the storeroom shelf to guard against disruptions to supplies from the EU, but the Office for National Statistics said a relatively small number of firms reported taking similar action.

Who’s Stockpiling?

There was no evidence of widespread Brexit stockbuilding at the end of 2018

Office for National Statistics

Note: figures include quarterly alignment adjustment

Brexit is not the only threat facing the economy. Major markets from the euro zone to China are losing momentum, weakening demand for British exports. Net trade cut 0.12 percentage points from growth in the fourth quarter as the trade deficit hit the highest in more than two years.

What Our Economists Say…

“Today’s GDP data confirmed that the lack of clarity around the U.K.’s future relationship with the EU is damaging economic growth. We think the economy is likely to show signs of further strain in the first quarter, but assuming a Brexit deal is agreed, we expect growth to rebound.”
— Dan Hanson, Bloomberg Economics. Read the full U.K. REACT

Other highlights:

  • Consumer spending growth stayed at 0.4 percent but business investment slumped 1.4 percent, the most since the start of 2016. Growth in services, the largest part of economy, slowed to 0.4 percent.
  • In December, all the main sectors of the economy shrank, with manufacturing falling for a sixth 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 12.1 billion pounds in value terms in December. But the gap excluding oil and erratic items widened amid a fall in exports.
  • Growth in 2018 slowed to 1.4 percent, and the BOE sees a further moderation this year to 1.2 percent.
  • GDP rose 1.3 percent in the fourth quarter from a year earlier, the weakest since the second quarter of 2012. Business investment was down almost 4 percent.

— With assistance by Harumi Ichikura, Jill Ward, David Goodman, and Lucy Meakin

(Adds political negotiations in third paragraph.)

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