Pound falls as UK economy unexpectedly shrinks by 0.3% in November

‘Lacklustre’ performance for manufacturing drags economy into contraction

The UK economy shrank by 0.3 per cent in November with manufacturers hit particularly hard, according to the latest official figures. Over the three months to November, growth came in at 0.1 per cent which was better than the 0.1 per cent contraction forecast by economists.

Manufacturing contracted by 0.8 per cent in the quarter and 1.7 per cent in November alone. The services sector, which makes up most of the economy, grew 0.1 per cent, the Office for National Statistics said. Construction performed the strongest of any major sector with 1.1 per cent growth, following a 0.8 per cent expansion in the three months to October.

Longer term, economic growth is running at its slowest annual pace since 2012.

November’s unexpectedly poor economic performance sent sterling 0.5 per cent down against the dollar on Monday, taking it below $1.30. The pound was down 0.4 per cent against the euro by mid-morning.

The pound is under pressure largely because the latest gloomy economic figures make an interest rate cut more likely when the Bank of England’s Monetary Policy Committee meets next month.

Three of the MPC members charged with making that decision have hinted that they could vote to reduce interest rates if the economy slows.

“There now looks to be a very real chance that the economy contracted marginally over the fourth quarter of 2019,” said Howard Archer, chief economic advisor to the EY Item Club. “At best it may have stagnated.

“Barring further revisions to the back data, GDP will have needed to grow 0.3 per cent month-on-month in December just for GDP to have been flat quarter-on-quarter over the fourth quarter.

The ONS data indicates that the economy would have to reverse a downward trajectory over the course of 2019 that has seen annual growth halved from 1.8 per cent to 0.9 per cent.

Eyes will now turn to indicators such as the purchasing managers’ index surveys (PMIs) which will give the first indication on whether there was an economic bounce after December’s general election.

There has been some hope that Boris Johnson’s victory will have provided a degree of certainty about the Brexit process. But the shape of future trade with the EU remains unclear, with negotiations on a deal to continue for at least the rest of 2020.

Businesses remain pessimistic about the economic outlook. Almost half of UK firms expect there will be a recession this year while one in three believes the contraction in growth could be as much as 4 per cent, according to a survey of senior directors.

The survey, carried out before Monday’s GDP figures by trade finance provider Stenn, found that almost two-thirds of firms ranked increased geopolitical tensions such as trade tariffs, Brexit or regional instability, as the number one risk to businesses in 2020.

The ONS’ head of GDP Rob Kent-Smith said: “Overall, the economy grew slightly in the latest three months, with growth in construction pulled back by weakening services and another lacklustre performance from manufacturing.

“The UK economy grew slightly more strongly in September and October than was previously estimated, with later data painting a healthier picture.

“Long term, the economy continues to slow, with growth in the economy compared with the same time last year at its lowest since the spring of 2012.”