Recession fears ease as UK GDP beats expectations in July
By Michele Maatouk
Date: Monday 09 Sep 2019
(Sharecast News) - The UK economy grew more than expected in July, according to figures released by the Office for National Statistics on Monday, easing concerns that the country might be on track for a recession.
Gross domestic product grew 0.3% on the month compared to no growth in June, beating expectations for a 0.1% expansion. This helped to allay fears after a 0.2% contraction in the second quarter, which marked the first time the economy had contracted since the fourth quarter of 2012.
Growth in the three months to July was flat, however, with falls in construction and manufacturing, although this was an improvement on the 0.2% drop in June and better than consensus expectations for a 0.1% dip.
The services sector grew by 0.3% in July following four months of stagnation, while manufacturing and construction rose 0.3% and 0.5% on the month, respectively.
Head of GDP Rob Kent-Smith said: "While the largest part of the economy, services sector, returned to growth in the month of July, the underlying picture shows services growth weakening through 2019.
"The trade deficit narrowed due to falling imports, particularly unspecified goods (including non-monetary gold), chemicals and road vehicles in the three months to July."
David Cheetham, chief market analyst at XTB, said: "While the figures are far from stellar, after a contraction in the second quarter the chances that we see a negative GDP print in the third have now dropped significantly, meaning that a technical recession will likely be avoided."
Paul Dales, chief UK economist at Capital Economics, said the latest figures provide more support to his view that the economy has not fallen into recession.
"Indeed, GDP will get a further boost of about 0.2% in August when car manufacturers will be at work when they are usually on holiday. And then even if GDP was flat in September, GDP would still rise by 0.4% quarter-on-quarter in Q3 as a whole. Following on from the 0.2% q/q fall in GDP in Q2, that would avert two consecutive quarters of falling GDP - the typical definition of a recession."
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the pick-up in July is a reassuring sign that the economy is on course to grow at a solid - perhaps even above-trend - rate in the third quarter, thereby substantially weakening the case for the MPC to cut Bank Rate before Britain's Brexit path is known.
Simon Harvey, FX market analyst at Monex Europe, said the GDP data should be treated with caution.
"Recession fears recede in the UK following a strong upwards surprise in July's growth figures, but notes of caution are plentiful in the report as Brexit keeps optimism capped.
"Today's release saw the UK economy grow by 0.3% MoM in July, lifting the rolling three-month average to neutral territory following a contraction in Q2. In normal times, a significant reaction in economic growth following a transitory event-driven contraction would prompt substantial positivity in financial markets. However, the reaction seen today highlights the underlying political uncertainty on the horizon. The head of GDP at the ONS was right to reference the likely slowdown in the service sector through to the end of 2019. Given that growth in services carried the expansion in July, the underlying tones of today's report shouldn't fill investors with confidence - especially given the negative surprise in August's service sector PMI.
"With a potential snap election, Brexit extension, and even a hard-exit from the EU on the cards for the UK economy in the second half of the year, recession fears should remain prominent in the market's focus."
The EY Item Club expects GDP growth to come in at 1.2% in 2019, which would be the weakest performance since 2009 and down from 1.4% expansion in 2018.
"Should the UK ultimately leave the EU with a 'deal' on 31 October, we expect an easing of uncertainties to allow economic activity to gradually pick up. Fiscal stimulus is also likely to help the economy in 2020, although a difficult global economic environment is likely to hamper exports and may also limit a likely pick-up in business investment resulting from reduced uncertainties. Consequently, GDP growth is still only seen at 1.3% in 2020," it said.
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