Panic over Britain’s Brexit growth dip is overdone

They’ll blame Brexit, won’t they? The question came from Bob, the engineer who came to fix my washing machine this morning, on hearing that UK growth fell in the second quarter for the first time in seven years.

It was more of a statement than a question from Bob, who you may have guessed is an ardent Brexiteer and sick to the teeth of moaning Remainers.

And he is right. Within seconds of the ONS figures coming out, the consensus view across the media, among Remainer politicians and many economists was that Brexit uncertainty caused the 0.2% fall in second quarter GDP and the first contraction since 2012.

The fall was a sharp turnaround from the 0.5% growth seen in the first three months of the year, and it caught most economists on the hop as they had forecast the economy flatlining. They went further, suggesting that we are now falling headlong into a recession because the third quarter figures will inevitably show another contraction. With Project Fear glee, they are now claiming this would take us into recession as two consecutive quarters make a recession.

In many respects, these commentators and economists are right to pin the slow-down in economic output and lower business investment on Brexit volatility. But where they are wrong is to automatically assume that we are now diving into recession territory.

This is why. If you look at the first quarter of the year, GDP growth was boosted by companies stockpiling goods and materials ahead of the first March 31st deadline. We know this because business leaders have told us so.

As the UK failed to leave by the deadline, most businesses have been running down their stocks back to more usual levels during the Q2 period. At the same time, car manufacturers were also cutting back on production – not only due to Brexit uncertainty but because of the global slowdown in vehicle sales.

That analysis is backed up by the make-up of the second quarter GDP numbers. They show that the biggest falls were in manufacturing production output and construction while the services sector was positive at 0.1%.

Here, though, is the twist, an optimistic one. Logically, if companies built up their stocks over the first quarter ahead of leaving the EU, but ran them down over the spring months, they are building up those stocks up again leading up to the new October 31st deadline. That makes sense.

If it is the case, this suggests that the third quarter figures for July, August and September will be stronger than the last few months and show growth, thus avoiding a recession. For now anyway.

That’s what I’m hearing from many business leaders on the ground. Some manufacturers say they are already seeing something of a bounce in the third quarter because the certainty of a EU departure – whether it be with deal or no deal – is helping to lift the mood. Visibly so. The boss of one export manufacturer said to me on a visit to Chesterfield – deep in the Derbyshire Leave countryside – earlier this week: “Weirdly, knowing we are leaving -whether with or without a deal – has brought optimism and a certain certainty. We’ve got some good orders in from across the EU, particularly Germany.” And tariffs, in the event of no-deal ? He shrugged his shoulders: “They will be about 4%. Tough, but that’s not going to harm the business. A deal would be better for business but we will manage.”

More worrying for his business – and the UK economy more generally – than the impact of a No Deal is the economic slowdown now snaking its way across Europe’s biggest economies. June was just as lousy for industrial output in Germany and France, both of which have reported figures showing far deeper weakness than had been forecast.

In Germany, industrial output for June fell 1.5% from May while output for France, out today, revealed a fall of 2.3%  Exports in both countries were badly hit, particularly in their car industries, and was blamed on falling demand from China caught up in its trade dispute with the US.

The hit was far bigger than expected. German exports fell 0.1% from May’s level while year on year they are down by 8%. This is the sharpest annual fall in nearly three years and forecasters reckon that exports will stagnate for 2019 overall.

The downturn prompted economists to predict a contraction in the second quarter, and cut their forecasts for growth in the Germany economy next year from 1.3% to 0.8%.

By contrast, the Chancellor, Sajid Javid, said Britain is still on track to grow faster than Germany, France and Japan next year: even the usually gloomy Bank of England forecasts the UK will grow by 1.3% this year.

In his first big outing as Chancellor, Javid also said he was not at all surprised by the latest Q2 figures because of the Brexit stockpiling and the subsequent unwinding. He also said the UK is unlikely to slide into recession, pointing out there is not a single leading forecaster who predicts one because the UK’s fundamentals are still strong.

Unsurprisingly, the currency markets went into overdrive with traders now betting on an interest rate cut. Sterling fell again, down to $1.208 against the dollar and €1.077 against the euro, down to levels last seen in August 2017.

That’s the rub: this is August, always a time of volatility and thin markets. Famous last words but my money is on a Q3 bounce rather than another blip.