Growth tipped to slow as Brexit uncertainty lingers

The British economy looks like it will avoid falling into recession in the runup to the scheduled Brexit date after official figures show growth held up in the three months through August.

Though the Office for National Statistics found the British economy contracted by a monthly 0.1 per cent during August, that was offset by an equivalent upward revision to July’s growth rate to 0.4 per cent.

That means the economy would have to contract sharply in September for the third quarter as a whole to be negative. Few economists expect that to happen, not least because of evidence that firms are stockpiling goods ahead of the scheduled Brexit date of October 31.

Firms fear that Britain could leave the European Union without a deal, which would mean widespread disruption to supply chains and the imposition of tariffs and other impediments to trade.

In the run-up to the original Brexit date of March 29, the stockpiling had helped the economy grow 0.5 per cent in the first quarter.

After the Brexit date was postponed, the stockpiling dissipated in the second quarter and the British economy contracted by 0.2 per cent. Were it to shrink again in the third quarter, it would officially be in recession — the common definition is two consecutive quarters of negative growth.

Though a recession appears unlikely for now, economists think growth will remain muted as long as Brexit uncertainty lingers, weighing on business investment in particular.

The uncertainty is set to persist. Though the British government says the country will leave the EU at the end of the month, legislation requires Prime Minister Boris Johnson to seek an extension to the departure if no withdrawal agreement is secured by October 19.

“Given the likelihood of a further Brexit delay – most likely coupled with a highly unpredictable general election — this situation is unlikely to improve any time soon,” said James Smith, developed markets economist at ING. “That said, the economy will most likely avoid a near-term technical recession.”

However, if Britain leaves the EU without a deal, most economists think a recession would be inevitable. The Bank of England has indicated it could be nearly as bad as that following the global financial crisis of 2008.

“The underlying pace of the economy is growing, but it’s just very modest,” Bank of England Governor Mark Carney said.

“That pace of growth, which is already weak, would weaken further from a no-deal Brexit.”

There has been speculation the Bank of England could cut its main interest rate from 0.75 per cent, even if Britain avoids a no-deal Brexit, though analysts said the latest growth figures ease the pressure to do so.