Brexit knocks Britain back in economic race with euro zone

Home-grown problems shave 0.2 per cent off UK GDP, while euro zone economy grows by the same amount

Germany's economy is also slowing but the reasons are mostly external. (Reuters)

The surprise contraction in Britain’s GDP means it is now trailing behind the euro zone, including Spain and Italy.

The UK economy shrank by 0.2 per cent in the second quarter, while output in the area using the euro rose 0.2 per cent. Spain’s GDP was 0.5 per cent higher than in the first three months of the year and Italy’s was flat.

The latest euro zone data does not include full statistics for Germany, the area’s largest economy, as the country’s GDP estimate is not due until next week.

The German economy was until recently forecast to have grown marginally in the second quarter. But following some unexpectedly weak numbers for June, next week’s data may now show a small contraction. Germany’s trade surplus, which reliably boosts its GDP, narrowed compared with a year ago and industrial production fell, according to data released this week.

However, the main headwinds battering Germany are external while Britain’s problems are mostly home-grown.

“For the last year, the German economy has been suffering from declining demand from China and the uncertainty caused by the trade war,” Jörg Krämer and Peter Dixon, economists at Commerzbank, wrote in a research note on Friday.

Foreign demand is particularly important to Germany’s export-driven economy. In contrast, Britain has run a trade deficit every year apart from two since 1999, as imports have consistently exceeded exports.

That is not about to change as the UK trade figures for the second quarter, published on Friday, showed a persistent trade gap. Imports again were higher than exports, although both fell.

What drove the latest drop in Britain’s GDP was a Brexit-related plunge in manufacturing, according to government statisticians.

“Manufacturing output fell back after a strong start to the year, with production brought forward ahead of the UK’s original departure date from the EU,” said Rob Kent Smith at the Office for National Statistics.

But the impact of Brexit spread beyond factories. Investment by all businesses fell 0.5 per cent and the service sector, which produces the bulk of the UK’s output, hardly grew. As pointed out repeatedly in business surveys and by the Bank of England, uncertainty about Brexit has constrained both of these drivers of growth.

Meanwhile, spending by consumers – which accounts for almost two-thirds of all spending in Britain – slowed, rising 0.5 per cent compared with the first quarter. That is in line with its average growth since the EU referendum, but in the years before the vote growth in consumer spending regularly exceeded 1 per cent.

Similarly, GDP grew by 1.7 per cent on average in 2016, 2017 and 2018, down from 2.4 per cent on average in the three years preceding the referendum.