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UK economy shrinks in Q2

The UK economy has shrunk for the first time in seven years, causing the pound to drop against the dollar and the euro.

The UK economy shrank by 0.2% between April and June, its worst performance since the fourth quarter of 2012, the Office of National Statistics (ONS) said.

‘GDP contracted in the second quarter for the first time since 2012 after robust growth in the first quarter,' Head of GDP at the ONS, Rob Kent-Smith said.

‘Manufacturing output fell back after a strong start to the year, with production brought forward ahead of the UK’s original departure date from the EU.’

Services sector fails to support UK economy

The services sector, which accounts for more than three quarters of total UK economic output, slowed to 0.1% in the second quarter of 2019 – its weakest quarterly figure in three years.

However, despite the service sector's poor performance, it was the only industry to make a positive contribution to growth between April and June, with the fall in UK economic output led by a sharp decline in manufacturing output.

‘Growth has been pushed down by an unwind of stockpiling and car manufacturers shifting their seasonal shutdowns,’ Confederation of British Industry’s lead economist Alpesh Paleja said.

‘Nonetheless, it’s clear from our business surveys that underlying momentum remains lukewarm, choked by a combination of slower global growth and Brexit uncertainty.’

Despite the downbeat economic figures, Chancellor of the Exchequer Sajid Javid said that ‘the fundamentals of the British economy are strong’ with wage growth and employment at a record high.

‘We’re forecast to grow faster than Germany, Italy and Japan this year,’ he added.

Pound slides as UK economy contracts

Sterling moved lower in reaction to the UK economy contracting for the first time in seven years on Friday, with it falling 0.3% against both the dollar and the euro.

The contraction of the UK economy and the decline of the pound show the impact that ongoing Brexit uncertainty is having on British economic output.

The latest economic data from the ONS will put added pressure on the Bank of England to consider easing monetary policy, but if rates are lowered the pound will likely be pushed lower.

This information has been prepared by IG, a trading name of IG US LLC. This material does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. You should not treat any opinion expressed in this material as a specific inducement to make any investment or follow any strategy, but only as an expression of opinion. This material does not consider your investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. No representation or warranty is given as to the accuracy or completeness of the above information. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. Any research provided should be considered as promotional and was prepared in accordance with CFTC 1.71 and designed to promote the independence of investment research. See our Summary Conflicts Policy, available on our website.

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