Larry Elliott and Angela Monaghan 

British economy begins to show signs of post-Brexit slowdown

Signs of retrenchment in construction industry, car factories and high street stores overshadow stronger than expected 0.6% expansion in run-up to vote
  
  

Bricks
RICS, the body that represents chartered surveyors, said workloads for construction had weakened. Photograph: David Davies/PA

Fears that the British economy has been knocked off course by the Brexit vote have been reinforced by signs of retrenchment across key industries, according to fresh reports.

The first health checks of important sectors since Britain voted to leave the European Union overshadowed growth figures, showing a stronger-than-expected performance by the UK in the run-up to the referendum.

An expansion of 0.6% in the British economy between April and June was countered by signals from the construction industry, car factories and high street stores that provide the Bank of England with justification for moving to boost growth when its interest rate-setting committee meets next week.

The City was braced for action – from the Bank and the Treasury – to head off the threat of recession after Thursday’s report. The chancellor, Philip Hammond, made it clear that there would be no repeat of the second quarter GDP growth in the months following Brexit.

Hammond said the UK would at least enter divorce negotiations with the EU from a position of strength after the Office for National Statistics said the best quarterly performance by industry since 1999 had pushed up overall economic growth from 0.4% in the first three months of 2016.

However, Hammond indicated a slowdown was imminent. “Those negotiations will signal the beginning of a period of adjustment, but I am confident we have the tools to manage the challenges ahead, and along with the Bank of England, this government will take whatever action is necessary to support our economy and maintain business and consumer confidence,” he said.

Sterling dropped on the foreign exchanges, despite the growth figures, amid speculation of a package of measures from the Bank’s monetary policy committee on 4 August that might include a cut in the cost of borrowing, a resumption of the quantitative easing money creation programme and incentives to boost lending to households and businesses.

The Bank has been weighing up what little evidence there has been of the state of the economy in the five weeks since the referendum.

In the latest batch of surveys released on Thursday, the Society of Motor Manufacturers and Traders said its members were gloomy about the prospects for growth, jobs and investment; the British Retail Consortium said jobs were being shed in the months leading up to the referendum; and RICS – the body that represents chartered surveyors – said workloads for construction had weakened.

The SMMT gave an upbeat assessment of the industry’s performance in the run-up to the referendum, with almost 900,000 cars rolling off production lines at UK factories in the first six months of the year. This was 13% more than the same period in 2015 and the best half-yearly performance since 2000. Almost 80% of the cars built in UK factories in the first half of 2016 were destined for other countries, with the EU the biggest market.

However, the SMMT’s chief executive, Mike Hawes, said the outlook for UK car manufacturing was uncertain now that Britain had opted to pursue a future outside the EU.

“The latest increase in production output is the result of investment decisions made over a number of years, well before the referendum was even a prospect,” he said.

Warning that this success was linked to membership of the single market, he said: “These decisions were based on many factors but primarily on tariff-free access to the single market, economic stability and record levels of productivity from a highly skilled workforce. To ensure the sector’s continued growth, and with it the thousands of jobs it supports, these must be priorities in future negotiations.”

The ONS said that construction was the one sector of the economy that was already going backwards in the period leading up to the referendum.

The chief economist of the RICS surveyors’ body, Simon Rubinsohn, said the uncertainty caused by Brexit had led to investment being delayed and concerns being raised about the availability of credit.

“Encouragingly, the swift actions of the Bank of England in creating additional capacity for the banking sector to provide funding to meet demand should help alleviate some of this pressure,” Rubinsohn said, referring to a £150bn boost to bank lending announced shortly after the Brexit vote.

“Nevertheless, anecdotal evidence does indicate that the challenge for the British government in establishing a new relationship with the EU could see some investment plans in the construction sector scaled back.”

The BRC reported that the equivalent number of full-time jobs in the industry fell by 2.4% in the second quarter, compared to the same quarter a year ago.

The tougher outlook from the BRC followed a separate survey from business lobby group the CBI on Wednesday that found retail sales falling at their fastest rate since early 2012. Evidence culled from retailers in the two weeks immediately after the referendum showed that companies were cutting back on orders from their suppliers at a rate not seen since the economy was deep in recession in 2009.

Frances O’Grady, the general secretary of trade union umbrella body the TUC, said: “It’s good news that growth strengthened in the last quarter before the referendum. The priority now is protecting growth from the fall in business confidence, and the risks to future investment, following the Brexit vote.

“The TUC has published an action plan to keep the economy moving and to make sure working people are not made to pay the price of Brexit. The government must give the go-ahead for a third runway at Heathrow, bring forward major new infrastructure projects like high-speed rail and announce a big expansion in housebuilding.”

The Treasury has already announced that it has scrapped plans previously announced by George Osborne to run a budget surplus by the end of the current parliament and Hammond dropped a broad hint that he would cut taxes or increase spending in his autumn statement when he said fiscal policy could be “reset”.

Economic news since the referendum has been mixed. Business surveys have raised the prospect of the economy going into reverse over the coming months, but the Treasury has been heartened by evidence that industrial production and consumer spending were both robust in the pre-referendum period.

Joe Grice, chief economist at the ONS, said the second quarter growth figures indicated little evidence that concern about a possible Brexit vote had a negative impact on the economy before the referendum.

“Continued strong growth across services, particularly in retailing, reinforced by healthy growth in the manufacture of cars and pharmaceuticals, boosted output in the second quarter.

“Any uncertainties in the run-up to the referendum seem to have had a limited effect. Very few respondents to ONS surveys cited such uncertainties as negatively impacting their businesses,” he said.

 

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