This week, the Office of National Statistics (ONS) announced the first fall in quarterly GDP in six and a half years, sparking fears of an upcoming recession. Here’s what you need to know.
What Is GDP?
GDP, or Gross Domestic Product, measures the total value of activity in the economy over a given period of time. When GDP is reported as being up on the previous three months, the economy is growing. If GDP is down, the economy is contracting.
What About A Recession?
A recession is where there are two consecutive periods of contraction (periods where the GDP is down).
The ONS announced this week that GDP in the UK had fallen for the first time in six and a half years. Many now fear that continuing Brexit uncertainty and events up to 31 October (the UK’s current scheduled departure from the European Union) could result in a second successive quarter of negative growth, and hence a recession.
What’s Brexit Got To Do With It?
Brexit uncertainty and the closure of UK car plants are thought to have had a significant impact on the GDP falling by 0.2% in the three months to the end of June. Brexit uncertainty has led to some businesses re-evaluating their operations in the UK and some moving elsewhere. Investment in the UK could be seen as a gamble for businesses due to the uncertainty posed by the UK’s scheduled departure from the UK.
A no-deal Brexit now looks increasingly likely, and it is understood this could have a significant impact on the UK economy. The pound fell to a 31-month low against the US dollar recently after it was announced the government is scaling up preparations for a no-deal departure.
A report earlier this year discussed the impact of Brexit on our economy. Research from the Centre for European Reform revealed that the vote to leave the EU cost the U.K.’s public finances £17 billion per annum, or £320 million a week, by September 2018. The centre’s deputy director, John Springford said;
“Britain’s decision to leave the EU damaged growth, largely thanks to higher inflation and lower business investment. The U.K. missed out on a broad-based upturn in growth among advanced economies in 2017 and early 2018. And the economic cost of the decision so far is sizeable, if not disastrous”
Is It Just Brexit?
Brexit can certainly be seen to be having an impact on our economy, but it is not the only factor. The extent to which Brexit is impacting our economy is debated, and some believe the impact will only be short-term. The ONS said all three main sectors of the economy struggled in the second quarter.
What Are People Saying?
The TUC General Secretary, Frances O’Grady has said,
“The prime minister’s toxic threat to crash out of the EU without a deal only adds to the alarm. It damages confidence in the economy, putting people’s jobs at risk.”
Meanwhile, the UK’s new Chancellor, Sajid Javid said,
“This is a challenging period across the global economy, with growth slowing in many countries. But the fundamentals of the British economy are strong – wages are growing, employment is at a record high and we’re forecast to grow faster than Germany, Italy and Japan this year. “The government is determined to provide certainty to people and businesses on Brexit – that’s why we are clear that the UK is leaving the EU on 31 October.”
In particular, the construction sector struggled in the last quarter. Construction output decreased by £521m over the quarter compared with Q1. Mark Robinson, chief executive of Scape Group said,
‘Today’s data presents a grim outlook on the state of the construction industry, with a £521 million drop in activity on the quarter. We have seen the biggest quarter-on-quarter decline from the public sector since records began two decades ago – with local authorities both reluctant and unable to push forward with delivering new offices, schools, hospitals, surgeries and shops. The stark reality is both the public and private sector are continuing to err on the side of caution and new work has flatlined.’
Many now fear that the GDP could fall for a second consecutive quarter, with uncertainty over Brexit and the seemingly increasing likelihood of a no-deal exit. If the economy contracts in the next quarter, the UK will officially be in a recession. The UK was last in a recession in 2009 in ‘The Great Recession’, a period of general economic decline in world markets.