One of Britain’s leading economic thinktanks has said the UK economy shrank last month as the impact of the Brexit vote led to a pronounced weakening in activity.
The National Institute of Economic and Social Research estimated that gross domestic product contracted by 0.2% in July.
Niesr published the findings after official government figures showed that the UK trade deficit widened and factory production eased back in the weeks immediately before and after the EU referendum on 23 June.
James Warren, a research fellow at Niesr, said: “We estimate that in the three months to July, the UK economy grew by 0.3%, a marked economic slowdown. The month-on-month profile suggests that the third quarter has got off to a weak start, with output declining in July. Our estimates suggest that there is around an evens chance of a technical recession by the end of 2017.”
The thinktank came to a gloomy conclusion after data from the Office for National Statistics (ONS) showed that a spurt in manufacturing came to an end in June, with output dropping by 0.3%. Meanwhile, UK exports failed to match imports, with the trade deficit rising by £0.9bn to £5.1bn.
The poor trade and manufacturing figures led to a fall in the pound on the foreign exchanges. At one stage, sterling dipped below $1.30 and threatened to reach a post-Brexit vote low, before later rallying.
However the ONS said there was little evidence of industry adopting a cautious approach because of uncertainty caused by the closely fought referendum campaign. The organisation’s chief economist, Joe Grice, said: “As we previously highlighted in our preliminary estimate of GDP, production and the wider economy grew strongly in April, and then remained at roughly the same level throughout May and June.
“Any uncertainties in the run-up to the referendum seem to have had little impact on production, with very few respondents to our surveys reporting it as an issue.”
The ONS said total production, which includes mining, output from the North Sea, energy supply and manufacturing, increased by 0.1% from May to June. Manufacturing, the biggest component of production, fell by 0.3%.
During the three months to June – which is considered a better guide to the trend than one month’s figures – production was up by 2.1% on the previous quarter, while manufacturing rose by 1.8%.
Despite the strong quarterly increases, manufacturing and overall production remain well below the peak reached in early 2008, when the UK was on the cusp of a recession. A steady decline in North Sea oil and gas output means that production is 7.5% below the early 2008 level, while manufacturing is 4.5% lower.
The struggles of manufacturing during and after the recession of 2008-09 have made it harder for Britain to close its trade gap with the rest of the world.
According to the ONS, there was an increase of £0.9bn to £12.4bn in the UK’s deficit in goods in June, offset by the continued strong performance of the service sector, which ran a surplus of £7.3bn.
Between the first and second quarters of 2016, the UK’s deficit in goods and services combined widened by £0.4bn to £12.5bn.
Lee Hopley, the chief economist at manufacturers’ association EEF, said: “The latest data suggests manufacturing posted some significant gains in the second quarter. Growth was supported by record levels of exports of cars to the EU and aircraft to non-EU markets.
“Clearly, indicators of sentiment post referendum suggest that we’ve hit the high point for manufacturing this year. Amid the wavering levels of confidence, however, we should take away some positive news, firstly that manufacturing entered this period of uncertainty from a relatively strong stance, and the weaker exchange rate could yet bring benefits on the export side.
“Still, we’ll need a concerted effort from government to maintain investment across the sector and ensure growth like that seen in the second quarter gets back on track.”
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