UK economy crumbles as Brexit fear takes toll

GDP expansion virtually stalls in fourth quarter, with country facing the worst year for growth since 2009 and recession possible if it leaves the EU without a deal

The Bank of England. Britain's economy is starting to show signs of Brexit stress. Bloomberg

The UK buckled under the strain of Brexit uncertainty in the fourth quarter.

Gross domestic product increased less than 0.2 per cent, compared with 0.6 per cent in the third quarter. December alone saw the economy shrink by 0.4 per cent, the most since before the 2016 vote to leave the European Union.

The slowdown over the quarter came as businesses cut investment for a fourth consecutive quarter, the longest continuous decline since the financial crisis, and the weakening global economy hit trade. The pound fell 0.3 per cent to $1.2909 as of 9.46am in London.

But there was no widespread evidence of stockpiling as the prospect of a no-deal Brexit looms larger, with inventories rising just £1.6 billion (Dh7.58bn) in the quarter.

While organisations such as Heathrow Airport and Unilever have said they are keeping more on the storeroom shelf to guard against disruptions to supplies brought in from the EU, the Office for National Statistics said a relatively small number of companies reported doing so.

The economy is facing the worst year for growth since 2009, with economists warning of a recession if Britain leaves the EU without a deal to smooth the transition on March 29. The Bank of England sees growth of 0.2 per cent in the first quarter, but the sudden loss of momentum at the end to 2018 suggests the economy could stagnate, as indicated in recent purchasing manager surveys.

With wage pressure building, the BOE might in different circumstances be preparing to raise interest rate. But officials last week signalled they have no intention of doing so until the “fog of Brexit” has cleared.

The fear gripping business was illustrated this month when Japanese car maker Nissan scrapped plans to build a new model in Sunderland, north-east England. Airbus, which makes wings for commercial aircraft in Britain, has also threatened to switch investment elsewhere. Business investment fell 0.9 per cent in 2018.

Brexit is not the only threat facing the economy. Major markets from the eurozone to China are losing momentum, weakening demand for British exports. Net trade cut 0.12 per cent points from growth in the fourth quarter as the trade deficit hit the highest in more than two years.

Consumer spending growth stayed at 0.4 per cent in the fourth quarter but business investment slumped 1.4 per cent, the most since the start of 2016. Services, the largest part of economy, slowed to 0.4 per cent growth.

In December, all the main sectors of the economy shrank, with manufacturing falling for a sixth consecutive month, the longest run of declines since the financial crisis. The fall in overall GDP was the largest since March 2016.

The trade deficit narrowed to £12.1bn in value terms in December. Growth in 2018 slowed to 1.4 per cent, and the BOE sees a further moderation this year to 1.2 per cent.

GDP rose 1.3 per cent in the fourth quarter from a year earlier, the weakest since the second quarter of 2012.