UK GDP: British economy stalls amid political uncertainty

Zero growth figure reflects impasse in final three months of last year
 Larry Elliott: UK economy can bounce back – but don’t expect boom-boom Britain

Workers in a factory

The British economy failed to grow in the final three months of 2019 amid political uncertainty over Brexit and the snap general election.

The Office for National Statistics said growth in gross domestic product (GDP) flatlined between October and the end of December, as consumer spending slumped over the Christmas shopping period and manufacturing output nosedived in the run-up to the general election.

The rate of growth slowed from 0.5% in the third quarter, against a backdrop of paralysis in Westminster before the snap poll and Boris Johnson’s unexpectedly decisive victory. City economists and the Bank of England had forecast zero growth in the fourth quarter.

Annual growth increased marginally to 1.4% in 2019, slightly above the 1.3% growth rate recorded in 2018.

Despite the slowdown in the final three months of the year and one of the weakest annual growth rates since the financial crisis, the latest snapshot revealed tentative signs of an early post-election bounce.

In a reflection of recovering business confidence, the ONS said the economy grew by 0.3% in December from the previous month, faster than forecast by City economists. Closely watched surveys of the service sector – the cornerstone of the economy – also rebounded in January to post the strongest upturn in activity since mid-2018.

The latest figures confirm a boom-bust year for growth with the annual performance distorted by aborted Brexit deadlines in March and October. Companies rushing to stockpile goods and raw materials to avoid border disruption fuelled growth spurts in the first and third quarters, while planned factory shutdowns led to GDP falling in the second quarter and flatlining in the fourth.

However, economists said the underlying momentum of the economy slowed over the year as a whole. Manufacturing output fell sharply in the fourth quarter, dragged down by weaker levels of production in the car industry, effectively finishing 2019 in recession after three consecutive quarters in contraction.

Howard Archer, the chief economic adviser to the EY Item Club, said: “Business and consumer confidence have clearly improved early on in the first quarter of 2020, and the overall impression is that this has led to some improvement in economic activity. However, with little hard data available so far, it is hard to judge just how much the economy is picking up and whether this can be sustained.”

Alongside Brexit deadlines disrupting the manufacturing sector, weaker levels of international trade amid the US-China trade war dented economic growth in Britain.

Business investment fell by 1% in the final quarter of the year, continuing a recent subdued performance as heightened uncertainty around Brexit and the trade war weighed on the willingness of companies to spend on new equipment.

Service sector output, which accounts for about 80% of the economy and includes hotels, shops, restaurants and the City, also remained subdued in the fourth quarter, according to the ONS, growing by just 0.1% in the weakest period since mid 2016.

Consumer spending slumped in the final months of the year, piling pressure on the struggling high street, with sales during the pivotal festive season falling below the expectations of retailers. The British Retail Consortium recorded a 0.9% decline in sales in November and December, warning that 2019 had been “the worst year on record and the first year to show an overall decline in retail sales”.

The ONS said quarterly GDP growth has been between 0.2% and 0.3% in 2019 on average, continuing the slowing that has been experienced over the previous five years.

Although there are signs of an early rebound in business confidence that could pave the way for stronger economic growth at the start of 2020, observers cautioned that the outlook remained fragile as the government negotiates EU and US trade deals. Johnson has committed to Britain leaving the Brexit transition period at the end of December, with or without a deal, with potential to cause severe disruption for UK and EU companies.

Seamus Nevin, the chief economist at Make UK, the manufacturers’ trade group, said: “The extent of political and economic uncertainty towards the end of last year has been laid bare with the economy spluttering to a halt.

“Business confidence in industry remains fragile with concerns about our future trade rules meaning that the taps of investment are unlikely to be turned on anytime soon. This is the main cause for concern so all eyes will be on the nature and quality of any trade deals secured over the next 11 months.”