LONDON: Britain’s economy has stalled, official data showed yesterday, as Brexit and political uncertainty contributed to slashing manufacturing output, heaping pressure on the Bank of England to cut interest rates. Gross domestic product contracted 0.3 percent in November, the Office for National Statistics said in a statement. It grew only 0.1 percent in the three months to the end of November, the ONS added.
Manufacturing meanwhile slumped 1.7 percent in November. Speaking ahead of the data a Bank of England policymaker, Gertjan Vlieghe, hinted at a potential vote in favor of a January cut to the BoE’s main interest rate, weighing on the pound yesterday. It followed comments Friday by fellow policymaker Silvana Tenreyro, who said she could support a rate cut from the current 0.75-percent level, if the economy did not strengthen.
And on Thursday, the bank’s outgoing governor, Mark Carney, said the monetary policy committee was looking at the merits of near-term stimulus. As for the latest GDP data, “a poor performance in November was always on the cards given that the uncertainties facing the economy were at a peak with the general election looming and doubts over what would happen on the Brexit front after it had been delayed again from 31 October”, noted Howard Archer, chief economic advisor to financial researchers EY ITEM Club.
“It is clear that businesses were cautious in their behavior while it also appears that consumers were reluctant to spend.” British Prime Minister Boris Johnson’s Conservatives convincingly won a general election in December that has broken the deadlock over the UK’s departure from the European Union.
Britain’s parliament last week finally approved Brexit, ending years of arguments that toppled two UK governments. “We expect the economy to get a lift in the early months of 2020 from a more settled domestic political environment following the Conservatives substantial win… and an easing of near-term Brexit uncertainties as the UK leaves the EU with Johnson’s deal on 31 January,” said Archer.
Yesterday’s official figures showed the economy in November – before last month’s decisive election win for Prime Minister Boris Johnson – was just 0.6 percent larger than a year before, the weakest expansion since June 2012. The November figure represented a slowdown from annual growth of 1.0 percent in October, after that month’s growth pace was revised up from previously reported data. Output in November alone shrank by 0.3 percent, the biggest drop since April. Economists polled by Reuters had expected unchanged output for the month.
The weak data, reflected the uncertainty of last autumn about Brexit and the election, said John Hawksworth, chief economist for accountants PwC. “It is too early to say for sure if economic momentum will pick up in the new year now the political situation is clearer, but our latest survey of the financial services sector with the CBI does suggest some boost to optimism since the election,” he said.
Sterling fell and government bond yields headed lower as financial markets priced in a 50 percent chance the Bank of England will cut interest rates on Jan. 30, after its next meeting. The BoE predicted in November that the economy would eke out limited growth in the fourth quarter, before recovering in 2020.
That forecast assumes progress towards a post-Brexit trade deal and a reduction in US-China trade tensions. In the past week, BoE Governor Mark Carney – who steps down in March – and two other rate-setters, Silvana Tenreyro and Gertjan Vlieghe, said a rate cut could be needed if those assumptions prove over-optimistic.
Two more policymakers, Michael Saunders and Jonathan Haskel, already support a rate cut. However, there have been some signs that business confidence has revived since Johnson’s Conservatives won an unexpectedly large majority in the Dec. 12 election. That victory put Britain on course to leave the European Union on Jan. 31 with a transition deal. However, Johnson has only given himself 11 months to reach a long-term trade deal with the EU, and some businesses fear they could face tariffs and other obstacles to trade with the EU from 2021.
Looking at the three months to November, which smoothes out some volatility, the economy grew by 0.1 percent versus poll forecasts for a 0.1 percent fall, due to unexpected upward revisions to September and October output, which the ONS said reflected late survey returns. “Overall, the economy grew slightly in the latest three months, with growth in construction pulled back by weakening services and another lackluster performance from manufacturing,” ONS statistician Rob Kent-Smith said. – Agencies