Blame it on stock rundowns tied to elevated inventories around the original Brexit deadline or cite whatever “one-off” factors you want to cite, but the bottom line is that the UK is now one more bad quarterly GDP print away from a technical recession.
The economy contracted 0.2% in the second quarter, far worse than the flat-lining consensus was looking for, and below the worst estimate from more than three-dozen economists.
Manufacturing contracted a grievous 2.3%, the worst showing since the crisis.
The immediate reaction from officials (and some market participants) was to cite distortions around the March Brexit deadline. Q1 was “perhaps sort of higher results than otherwise because businesses were stockpiling for the Brexit that was to be, and now they’re using those stockpiles”, Chancellor of the Exchequer Sajid Javid said.
“If it comes to no deal, it’s not anything that I’m frightened of, I’m not worried about, I think we will be ready for it, we will get through it, and we will come out stronger and even more resilient”, Javid told Sky, later in the day.
Fingers crossed on that.
The breakdown of the Q2 numbers shows production slumping, dragging the entire economy along with it.
Obviously, this isn’t the best news for the BoE, which has been reluctant to price in a no deal scenario and would still like to hike rates again at some point, despite the dovish pivot from global counterparts.
It also raises the stakes for Boris Johnson, who is determined to “deliver a Brexit” one way or another by the end of October.
“We previously thought that an extension of Article 50 beyond 31 October, leading to an election or a referendum, was the most likely outcome [and] this is still a likely scenario, with Parliament set to intervene to prevent a disorderly outcome”, BNP wrote, in a note dated Thursday, adding that an election prior to the October 31 deadline is “also increasingly possible”.
Still, the bank lifts their subjective probability of a no-deal Brexit from 40% (on 21 May) to 50%.
Market participants have become almost wholly numb to the Brexit charade after more than three years of absurd bickering, but the pound’s recent plunge and Johnson’s determination to move forward, come hell or high water, should be a wake up call.
“Even if some of the no-deal rhetoric has been purely a negotiating tactic, it has still made it all but certain that there will be continued confrontation between the UK Government and both the EU and the UK Parliament before October 31”, BNP goes on to say, in the same Thursday note. “Given the volatile political environment and tight timetable, the path from here remains extremely uncertain”.