UK economy suffers slashed growth outlooks and lacklustre trade data

Government ministers have been increasingly talking of the prospect of a 'no deal' scenario in 2019, which the vast majority of economists and business leaders believe would be disastrous for the UK

Data from the Office for National Statistics showed that the UK had racked up a record trade in goods deficit in August (Bloomberg)

Slashed growth forecasts, record weak trade data and a significant job cull in the private sector cast a pall over an already bruised UK economy on Tuesday, as Brexit negotiations showed scant signs of progress.

In its twice yearly World Economic Outlook, the International Monetary Fund gave a downbeat assessment of Britain, citing a slump in private consumption and a dramatic tumble in the value of the pound as reasons for its lower projections of activity this year.

It raised growth forecasts for all advanced economies apart from Britain and said it now expects the UK economy – which grew at just half the rate of the eurozone’s in the second quarter of this year – to expand by just 1.7 per cent in 2017, down from an April forecast of 2 per cent.

“The slowdown is driven by softer growth in private consumption as the pound’s depreciation weighed on household real income,” the Washington-based multilateral organisation said.

It described the medium-term growth outlook as “highly uncertain” and said that it depended at least in part on the UK’s future economic relationship with the EU, and the extent of the increase in barriers to trade, migration and cross-border financial activity.

Government ministers have been increasingly talking of the prospect of a “no deal” scenario in 2019, which the vast majority of economists and business leaders believe would be disastrous for the UK.

Separately on Tuesday, data from the Office for National Statistics showed that the UK had racked up a record trade in goods deficit in August, reflecting a grossly disappointing exports performance since the Brexit referendum and strong imports.

The UK exported £28.1bn of goods during the month and imported £42.4bn, leaving a deficit of £14.2 – the highest monthly total ever.

Suren Thiru, head of economics at the British Chambers of Commerce, said that the figures suggested the decline in sterling over the past year was doing little to boost the UK’s overall trade position.

“Businesses continue to report that the post-EU referendum weakness in sterling is hurting as much as it’s helping,” he said. “For those companies that rely on overseas suppliers for their production equipment, a weak pound also makes investment in growth less viable.”

The British economy displayed an unexpected resilience in the immediate aftermath of June 2016’s Brexit vote, with GDP growing by 0.4 per cent in the third quarter of the year and 0.6 per cent in the three months. But this year it has spluttered as higher inflation due to the slump in sterling has curbed household consumption.

GDP growth was just 0.3 per cent in the second quarter of 2017. Growth over the same period in the 19-member single currency bloc was 0.6 per cent.

Inflation hit 2.9 per cent in August, matching a reading from May, which itself was the highest since June 2013. Annual total wage growth in the three months to July was just 2.1 per cent, meaning real wages are contracting again.

The IMF said that it now only expects the UK to outperform a small handful of its peers this year, including Italy, which is expected to grow by 1.5 per cent, France, which is seen expanding by 1.6 per cent, and Japan which is forecast to grow by 1.5 per cent.

Exacerbating concerns about the health of the UK economy and its ability to weather Brexit, the Office for Budget Responsibility – the Treasury’s official forecasting body – on Tuesday said it had become more pessimistic about the UK’s productivity.

“We anticipate significantly reducing our assumption for potential productivity growth over the next five years,” it said in its annual Forecast Evaluation Report.

“Other things being equal a downward revision to prospective productivity growth would weaken the medium-term outlook for the public finances.”

The OBR has been persistently over-optimistic about UK productivity growth since it began forecasting in 2010 and the latest warning is significantly weaken the outlook for public finances at the November Budget, giving the Chancellor, Philip Hammond, less leeway against his own spending rules.

Frances O’Grady, general secretary of the Trades Union Congress, said that productivity downgrades were the consequences of Government policy mistakes since 2010.

“Britain’s productivity headache is a self-inflicted wound. Years of cuts, low public investment, and rising job insecurity have taken a heavy toll,” she said.

In the private sector on Tuesday, BAE Systems’ announcement that it plans to almost 2,000 jobs, largely as a result of a slowdown in orders for its Eurofighter Typhoon fighter jets, sparked concerns about funding.

Up to 750 jobs will be slashed at BAE’s Warton and Samlesbury plants in Lancashire and up to 400 people will be made redundant in Brough, East Yorkshire. Other reductions will be made across plants in Leeming, Portsmouth & Solent and across London and Guildford.

“It is time for the Government to address the clear uncertainty that is felt by the industry and come forward with an urgent plan to save these jobs,” said Shadow Defence Secretary Nia Griffith.

GMB national officer Ross Murdoch said that the Government must “stop dithering if it wants to save the UK’s highly skilled aerospace jobs”.

“With the ever-increasing likelihood of failure to reach agreement on Brexit, which brings its own economic and employment uncertainty, UK manufacturing needs a strong Government to fight to secure these jobs,” he said.