U.K. economy set to skirt pre-Brexit recession but outlook weak

Britain’s economy looks to have dodged recession in the run-up to its deadline for leaving the European Union this month, but the pace of growth has sagged as exporters felt the impact of the slowing world economy, official data showed on Thursday.

Gross domestic product in the three months to August was 0.3-per-cent higher than in the previous three months, beating all forecasts in a Reuters poll of economists and accelerating from an upwardly revised 0.1 per cent in the three months to July.

But the stronger performance largely reflected revisions to earlier months and the most recent figures were weak. Output in August alone fell by 0.1 per cent on the month versus economists’ average forecast for it to hold steady, the Office for National Statistics said.

Sterling edged up against the U.S. dollar following the stronger-than-expected data.

The world’s fifth-biggest economy shrank in the second quarter, driven by a sharp decline in April when businesses found themselves holding unnecessary stockpiles of raw materials after Brexit was delayed from the original date of March 29.

The Bank of England predicted last month that Britain’s economy would grow by 0.2 per cent in the third quarter, bolstered in part by higher public spending. BoE governor Mark Carney said the underlying rate of growth was even weaker and Thursday’s data “is consistent with that picture.”

Investec economist George Brown said Britain was set to avoid a recession. “But at the same time it is apparent that growth is fragile amid the uncertainty surrounding Brexit and the global economic backdrop,” he said.

The annual rate of GDP growth slowed to 1.1 per cent from 1.3 per cent, matching a seven-year low set in June.

British Prime Minister Boris Johnson has promised to take Britain out of the EU by Oct. 31, without a transition period if necessary — despite parliament telling him to delay Brexit again if he cannot negotiate a fresh deal. Businesses say a no-deal Brexit risks causing major disruption to imports.

Two straight quarters of contraction would mean Britain’s economy met a commonly used definition of recession, but the ONS said it would need to shrink by an almost unprecedented 1.5 per cent in September alone for this to happen.

As well as Brexit, manufacturers across Europe have been hit by a rise in trade tensions between the United States and China.

So far the Bank of England has not followed the U.S. Federal Reserve and European Central Bank and cut interest rates but last month one BoE policy-maker, Michael Saunders, said this might prove necessary.

September’s IHS Markit purchasing managers’ index data released last week for the private sector pointed to a 0.1-per-cent contraction in the third quarter, with businesses reporting that foreign customers were staying away before Brexit.