Darling, I Shrunk The Economy

Britain's economy shrinks

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What's going on?

Official data out late last week revealed that the British economy shrank in the second quarter of 2019 – for the first time in six and a half years.

What does this mean?

The UK’s continental neighbors are having a tough time of it at the moment: Friday saw, variously, news of sharply falling French industrial production in June, German export figures down 8%, and fresh political meltdown in economically stagnant Italy.

While economists are expecting Germany’s economy – Europe’s largest – to have shrunk last quarter, they hadn’t thought the same would be true of Britain. Turns out, however, that slowing global growth, combined with an ever-weaker manufacturing sector since the UK postponed its departure from the European Union – plus the heightened risk that it may now leave without an exit deal in October – conspired against the British economy: it contracted by 0.2% versus the first three months of the year.

Why should I care?

For markets: The pound is paling.
Britain’s currency has lost nearly 5% of its value compared to the dollar since the start of July, and it’s also sitting at a two-year low versus the euro. Investors selling the pound may be doing so due to the increased chance – now 70% – that the Bank of England will cut UK interest rates later this year in an attempt to get the economy back on track. Access to cheaper borrowing could boost British companies’ profits – but it would also make British investments less attractive to overseas investors.

The bigger picture: Expecto patronum?
While British wage growth and consumer spending remain strong, and the UK’s crucial services sector expanded slightly last quarter, thoughts are already turning to the country’s next quarterly economic growth update, due in November. Any further contraction this quarter – perhaps if businesses yank (even more) investment in the face of a definite no-deal Brexit – would, as the UK’s new prime minister might put it, mean regnum unitum est in, um, recessionem.

Originally posted as part of the Finimize daily email.

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