UK set to avoid recession in 2019, despite Brexit uncertainty

We take a look what is behind the latest GDP growth figures and what it may mean for interest rates.

Despite mounting uncertainty surround Brexit, Britain is on track to avoid a recession in 2019, according to the latest figures from the Office of National Statistics (ONS).

According to the ONS' latest projections, in the three months to the end of August the UK economy grew by 0.3%. Despite the economy unexpectedly contracting in August, the ONS has revised upwards growth rates for both June and July, with the latter revised to 0.4% from 0.3%.

In the second quarter of the year, the UK's economy shrank by 0.2%. However, with July's figures revised upwards, the UK now looks on track to post positive figures for the third quarter, dated from July to September. That would allow the UK to avoid a recession – the technical definition of which is two consecutive quarters of negative growth.

As Azad Zangana, senior European economist and strategist at Schroders, notes:

"Even if there is a very large fall in GDP in September – the final month of the third quarter – the quarterly growth figure will be positive."

Pantheon Macroeconomics now estimates that absent any shocks for September GDP figures (which are yet to be released), GDP growth for the third quarter will be 0.4%. The economics consultancy points out this is double rate anticipated by the Bank of England in the minutes of their September meeting.

What impact did Brexit have on GDP figures?

Panetheon Macroeconomics estimates that a rebound in car production contributed 0.07 percentage points to the 0.3% growth figures in the three months to the end of August. "Many car manufacturers decided to bring forward annual shutdowns for plant maintenance from August to April, in order to minimise the potential costs of a no-deal Brexit in March," the economics consultancy says.

However, Pantheon Macroeconomics says that stockpiling of inventory by businesses ahead of a no-deal Brexit made no meaningful contribution to the figures. This was the case in the first quarter of the year, as businesses increased orders ahead of potential disruptions following the original Brexit deadline of March 31st.

Growth over the three-month period to August was primarily driven by momentum in the services sector. According to the Pantheon Macroeconomics, the sector was the strongest it has been since March and primarily reflects solid growth in household real incomes.

Pantheon expects the momentum in household spending to continue, citing loosening credit conditions, falling borrowing costs, continued wage growth, low inflation and expected increases in government spending. They note:

"Brexit uncertainty has dulled sentiment, but has not turned households' decidedly pessimistic."

Zagana, however, is less positive. He points out that the figures still show the Brexit risk to economic growth, pointing out that August’s weak growth figures coincide with the government ramping up threats to leave the EU with no deal.

What does it mean for interest rates?

The outlook for interest rates in unclear, says Zagana. He cites the fact that the Bank of England has been resolute that interest rates may need to rise if a smooth Brexit can be achieved. There is not, however, consensus. Zagana says:

"One of the more hawkish members of the policy committee has recently signalled that interest rates may need to be lowered, even with a smooth Brexit being achieved."

Pantheon Macroeconomics takes the view that markets are pricing in too great a chance of the Bank of England cutting rates over the next six months. They argue that more concrete signs of a slowdown will need to emerge first. The economic consultancy says:

"We anticipate easing only in the event of a no-deal Brexit, which we see as a 20% risk; rolling Brexit uncertainty isn't damaging enough to warrant loosening."