Fears that the UK could be heading for its first recession in a decade have been stoked by grim official figures showing that the economy contracted in the second quarter of 2019.
Brexit uncertainty, car plant shutdowns and the running down of stock built up before the original end of March deadline for Britain’s EU exit resulted in gross domestic product shrinking by 0.2% in the three months ending in June.
News from the Office for National Statistics of the first fall in quarterly GDP in six and a half years sparked immediate speculation that a further bout of Brexit jitters leading up to the new 31 October departure date could lead to a second successive quarter of negative growth – the technical definition of a recession.
The chancellor, Sajid Javid, said: “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.”
John McDonnell, the shadow chancellor, said: “Today’s dismal economic figures are a direct result of Tory incompetence. The Tories’ Brexit bungling, including Boris Johnson now taking us towards no-deal, is breaking the economy.”
Gross domestic product (GDP) measures the total value of activity in the economy over a given period of time.
Put simply, if GDP is up on the previous three months, the economy is growing; if it is down, it is contracting. Two or more consecutive quarters of contraction are considered to be a recession.
GDP is the sum of all goods and services produced in the economy, including the service sector, manufacturing, construction, energy, agriculture and government. Several key activities are not counted, such as unpaid work in the home.
The ONS uses three measures that should, in theory, add up to the same number.
• The value of all goods and services produced – known as the output or production measure.
• The value of the income generated from company profits and wages – known as the income measure.
• The value of goods and services purchased by households, government, business (in terms of investment in machinery and buildings) and from overseas – known as the expenditure measure.
Economists are concerned with the real rate of change of GDP, which accounts for how the economy is performing after inflation.
Britain’s government statistics body, the Office for National Statistics, produces GDP figures on a monthly basis about six weeks after the end of the month. It compares the change in GDP month on month, as well as over a three-month period.
The ONS warns that changes on the month can prove volatile, preferring to assess economic performance over a three-month period as the wider period can smooth over irregularities.
The most closely watched GDP figures are for the four quarters of the year; for the three months to March, June, September and December.
The figures are usually revised in subsequent months as more data from businesses and the government becomes available.
The ONS also calculates the size of the UK economy relative to the number of people living here. GDP per capita shows whether we are actually getting richer or poorer, by stripping out the impact of population changes. Richard Partington
The pound fell to a 31-month low of just over $1.20 against the US dollar after the news, amid concerns in the currency markets that the government is preparing for a no-deal departure from the EU. Sterling has dropped by 3% against the US currency since Boris Johnson became prime minister last month.
David Cheetham, the chief market analyst at XTB, an online trading firm, said: “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 performance of the economy in the second three months of 2019 was much worse than most experts had predicted. It followed growth of 0.5% in the first three months of the year, when the economy received a boost from unprecedented stockpiling by manufacturers in the run-up to the initial Brexit deadline of 29 March.
The ONS said all three main sectors of the economy struggled in the second quarter. Production – which includes manufacturing, energy and mining – contracted by 1.4% in the three months to June, largely because of firms running down their Brexit inventories and car plants bringing forward their usual summer maintenance shutdowns to April.
Services – which account for about 80% of the economy – registered positive growth in the second quarter but the 0.1% expansion was well down on the 0.4% growth in the first three months of the year.
As recently as last week, the Bank of England said in its quarterly inflation report that it expected growth to flatline in the second quarter.
The TUC general secretary, Frances O’Grady, said: “Negative growth at home and weaker growth around the world is a major worry for workers and business.
“The prime minister’s toxic threat to crash out of the EU without a deal only adds to the alarm. It damages confidence in the economy, putting people’s jobs at risk.”
The performance in the second quarter meant the economy’s annual growth fell from 1.8% to 1.2%. Early evidence has suggested only slightly stronger activity at the start of the third quarter of 2019.