Chief economist update: The UK is not OK

When it met on August 1, the Bank of England (BOE) rightly anticipated slower GDP growth in the second quarter, saying: "After growing by 0.5% in 2019 Q1, GDP is expected to have been flat in Q2 ... reflecting both the impact of intensifying Brexit-related uncertainties on business investment and weaker global growth on net trade."

As it turned out, the BOE's "no growth" forecast was still optimistic. The Office for National Statistics (ONS) preliminary estimate show UK GDP contracted by 0.2% in the second quarter - the first quarterly rate of decline since the December quarter of 2012 - taking the economy's annual growth rate down from 1.8% in the first quarter to a seven-year low of 1.2%.

While the FTSE-100 index continues to produce a positive return (7.7%) this year-to-date - supported by the weak currency - it has fallen by 5.6% from its 2019 high, recorded a few days after Boris Johnson assumed office as UK Prime Minister on July 24.

The only positive that could be inferred from the latest National Accounts is that it reinforces the BOE's view that recent UK data had been volatile and that it's payback for the strong first quarter economy.

This volatility is underscored by the reversals in business investment which subtracted 4.0 percentage points off second quarter GDP after contributing 2.8 pps in the March quarter; inventories (-2.2 pps from +1.5 pps); and, net trade (+3.5 pps from -3.0 pps)

However, note the sharp turnaround in net trade was due to exports (down 3.3% in Q2) dropping by less than imports (down 12.9%) - reinforcing the general sense of uncertainty over Brexit, trade tensions and the slowing global economy.

This is hardly surprising given indications of slowing and even fears of a recession in the US - which accounts for 19% of total exports - and the European Union - which purchases 45.6% of the UK's total shipments.

This could only worsen given latest speculations that Germany - the EU's biggest economy - is headed for its first recession since 2013 and the growing political risk in Italy. Germany buys 8.7% of the UK's total exports - the largest in the EU - while Italy accounts for 3.1% - the fourth largest.

The continuing deterioration in the UK's economic fundamentals has ignited BOE rate cut speculations. But with the Bank Rate at 0.75% -- just 50 bps above its record low of 0.25% -- and QE still in place, it's not the liquidity and the cost of borrowing that's the UK's problem.

The problem is the dent on business and consumer confidence caused by uncertainties from Brexit and US-China trade tensions.

Read more: USBOEBrexitEUBank RateGermanyItalyQEBank of EnglandBoris JohnsonEuropean UnionNational AccountsOffice for National Statisticsrecent UKUK GDPUK Prime MinisterUS-China
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