A Close Shave

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What's going on?

Data released on Thursday showed the UK economy shrank by 0.1% in August compared to July – but upward revisions to earlier data suggest the country has managed to avoid a recession. Cracking news, lad (tweet this).

What does this mean?

Economists had predicted that the British economy in August would be the same size as in July, so the shrinkage – although slight – was likely a disappointment. But Thursday’s update also showed economic growth in June and July was higher than initially measured, partly thanks to refreshed (and more accurate) readings from the all-important services industry.

The British economy shrank in the second quarter of this year. But July’s higher growth has offset August’s decline – and barring a dramatic collapse in September, third-quarter economic growth is all but guaranteed for the UK. That’ll be a relief for investors: if the economy shrank this time around, it would’ve technically been in a dreaded recession.

Why should I care?

For markets: A grand day out.

The value of the British pound rose against the US dollar on Thursday, but – fortunately for existing UK stock market investors – perhaps not by enough to turn foreign investors off British stocks (which also rose slightly). Typically, a more expensive currency might dissuade international buyers, given that their cash doesn’t go as far. But now there’s no immediate recession in the offing, British companies may have had a better third quarter than expected.

The bigger picture: The curse of the were-Brexit.

A relatively muted investor reaction to Thursday’s release suggests they’re waiting on economy-shaping Brexit updates before committing to anything. First-quarter economic growth got a boost from companies that stockpiled goods before the UK’s planned-then-postponed March exit from the European Union. But a lack of repeat purchases then shrank the second quarter. The UK’s trade terms with Europe, likewise, will affect companies’ manufacturing, purchasing, and hiring decisions – in turn driving their earnings and the economy as a whole.

Originally posted as part of the Finimize daily email.

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