By Conor Lambe, Chief Economist at Danske Bank
In the three years that have passed since the UK voted to leave the European Union, it would be fair to say that the performance of the economy has been relatively sluggish. But in recent months, the UK economy has lurched downwards.
We are now just over two months away from 31 October – the new ‘Brexit Day’ – and there is still very little clarity over what exactly will happen on that date. With Boris Johnson in place as Prime Minister it appears as if the chances of a no-deal Brexit have increased. But one thing is for certain – the economy is definitely not firing on all cylinders as we approach this potentially momentous date.
In the second quarter of the year, the UK economy contracted. This was the first quarterly fall in GDP since 2012. It’s true that there were a few unusual factors which contributed to this fall in output. After building up stock levels in advance of the original ‘Brexit Day’ at the end of March, many businesses ran down some of this stock in quarter two. In addition, some car manufacturers closed their factories earlier than usual this year as part of their Brexit preparations. But this fall in output can’t just be put down to these one-off factors. The data showed that the underlying economic performance was pretty weak.
Business investment fell in the second quarter of the year, which we can attribute to Brexit-related uncertainty again taking a significant toll on businesses’ capital spending.
There were falls in both production activity and construction output over the April – June period, and while the services sector did expand, the quarterly rate of growth was the lowest since the second quarter of 2016.
And while this year’s trade data is quite volatile given Brexit-related activity before the original March deadline, the softening global economy means that exports can’t be relied on to support UK economic growth. The pace of economic growth in both the US and the euro area was slower in the second quarter of the year than the first and in July, the IMF revised its 2019 global economic growth forecast slightly downwards.
It’s not just the official numbers that have shown a weakening in the UK’s economic performance – survey data also suggests the economy is under pressure. The July PMI data for the UK came in at below 50 for both the manufacturing and construction sectors which implies that activity is declining. The services PMI data was more positive, but still weak when compared with its post-crisis average.
As we move further into the third quarter of the year, it’s evident that the UK economy is relying on consumers for growth and therefore to, hopefully, avoid the technical recession that would occur if GDP contracted again in Q3 2019. Consumer spending growth was reasonably healthy in the first two quarters of this year and with the UK employment rate currently the joint highest on record, annual earnings growing at the fastest pace since 2008 and inflation just marginally above the Bank of England’s two per cent target, consumer spending growth is likely to continue supporting the economy in the short-term.
It’s also worth noting that businesses may start stockpiling again over the coming weeks in advance of the new Brexit deadline which would also provide a temporary boost to growth, similar to what happened at the start of the year.
In Northern Ireland, it’s likely to be a broadly similar story to that of the wider UK. We don’t yet have official data for the second quarter of the year, but a weaker picture of the local economy’s performance would not be a surprise given the UK experience.
The Northern Ireland economy is also likely to find itself relying on consumer spending as a driving force for short-term growth rather than business investment or exports. Local consumer spending power is being supported by the strong labour market and rising wages. The latest employment data revealed that the Northern Ireland employment rate hit a record high over April – June, while the unemployment rate remained low by historical standards. In the second quarter of the year, a quarter of those surveyed for the Danske Bank Northern Ireland Consumer Confidence Index said that rising wages was the factor that had the largest positive impact on how they were feeling.
With every passing day, the UK’s departure from the European Union moves another step closer. Predicting what is going to happen with Brexit has never been easy, and if anything, it’s even more difficult now. However, given the considerable damage that leaving the EU without a deal would do to the UK economy, I remain hopeful that a no-deal Brexit will be avoided.
As the UK approaches the potential Brexit cliff edge, it is not doing so in a position of economic strength. It’s imperative we don’t fall off.
This article was published in The Belfast Telegraph on 27 August 2019.