The UK’s Economy Has Shrunk

The size of the UK economy is not an issue that most of us give a lot of though to. We probably think it really doesn’t affect us on a day-to-day basis. In a way that is correct, but it will have its impact on us all in one way or another. Moolr take a look at the implications of the news that the UK’s economy has shrunk.

Latest Situation

Within the last week, the Chancellor Sajid Javid has commented that he does not expect a UK recession. This comment was in reaction to the news that the UK economy has shrunk, an uncommon event. It shrank by 0.2% between April and June.

The decline was a surprise after talk of stockpiling goods with Brexit on the horizon. Stockpiling can actually boost growth in the short-term (and not beyond) The car industry has also implemented shutdowns. Unsurprisingly, the pound sank further after the shrink was announced, raising fears of a recession. Manufacturing output fell and the construction sector weakened.

Economists had not been forecasting a contraction in the economy in the second quarter, but had expected it to stagnate. 0% growth was widely predicted, in other words.

Why is the economy shrinking?

The surprise at the shrink comes after a 0.5% growth in the first quarter of the year. Stockpiling helped then too though. Now the prospect of Brexit is having an effect in other ways. Stockpiles are partially running out and the aforementioned car manufacturer shutdowns are occurring, many ahead of the original schedule. This has naturally hit growth in the economy. Manufacturing output is down and the service sector has failed to take up the slack as it has in the past.

The Chancellor’s View

Not surprisingly, Mr Javid is being bullish. He has reiterated that he does not expect a recession as a consequence of the latest figures. He added that experts are not forecasting one either. However, the Bank of England said earlier this month that it expects the economy to grow by 1.3% this year, down from a previous projection of 1.5% in May.

The Economists’ View?

So are economists backing up the claims of the Chancellor? Not really. Many see the UK as skirting on the edge of a recession right now. It would not take much to sink headlong into it. A no deal exit from the EU would certainly cause a recession. The global situation is also quite gloomy in many places, but private consumption may keep economies’ heads above water. Household spending in the UK is up, so there is no panic just yet. If stockpiling ends however, trends could change for the worse.

The pound

The pound, which has been slumping for a while, fell further as expected after the figures were released.  The currency falls too if there are predictions that interest rates will be cut. A cut next January is widely predicted.