The surge and contraction in GDP over the first half of the year can be blamed on the original 29th March Brexit deadline. While we expect a similar pattern in Q3/Q4 due to the current 31st October deadline if there isn’t a no deal, we doubt it will be as pronounced.
- The surge and contraction in GDP over the first half of the year can be blamed on the original 29th March Brexit deadline. While we expect a similar pattern in Q3/Q4 due to the current 31st October deadline if there isn’t a no deal, we doubt it will be as pronounced.
- The swing in GDP from an expansion of 0.5% q/q in Q1 to a contraction of 0.2% in Q2 was largely due to activity being shifted into Q1 from Q2 ahead of the original 29th March Brexit deadline. What happens in Q3/Q4 obviously depends on whether there is a Brexit deal, a no deal or a delay. But it also depends on the underlying trend and the influence of the current Halloween Brexit deadline.
- Admittedly, it’s difficult to get a handle on the exact impact of the original deadline. Stockbuilding in the export-oriented manufacturing sector ahead of the original Brexit deadline was a key influence on GDP growth in Q1/Q2. On the face of it, stockbuilding added 0.5 percentage points (ppts) to GDP growth in Q1 before knocking 0.4ppts off growth in Q2. But a good deal of those stocks were imported, so that overstates the impact. In order to get a better idea, we compare UK manufacturing output to what it would have been if there had been no stockbuilding distortions and it had followed the trend of its G7 counterparts instead. Using this method, we estimate that stockbuilding added 0.2ppts to growth in Q1 before knocking 0.2ppts off growth in Q2.
- The car sector also added to the Brexit-related volatility in the first half of the year. Car manufacturers moved their annual shutdowns from August to April in case of a no deal Brexit on the 29th March, which subtracted 0.1ppts from Q2 GDP growth. (See Table 1.) Taking these factors into account, we think that underlying growth in Q2 was about 0.2% q/q, a little slower than the 0.3% q/q rate in the second half of 2018.
- The influence on GDP growth around the 31st October deadline will probably be different. The road might be slightly bumpier for two reasons. Car plants will be kept open in August when they are usually closed, so GDP growth will receive an added boost from the car sector of around 0.1ppts in Q3. (There may also be a chance that they close in November which would be an extra drag on Q4.) Second, government spending could add a further 0.1ppts. Indeed, the new Chancellor has pledged an extra £2.1bn of funds for a no deal preparations on top of the previous £4bn pledged by Theresa May.
- But there are also two reasons why the road may be smoother. The lift from stockbuilding will probably be smaller in Q3 compared with Q1. According to the manufacturing PMI survey, most firms have held onto the stocks they built up in Q1, so we doubt firms will increase their stockpiles significantly in the run up to the October deadline. As a result, we expect only a 0.1ppt boost from stockpiling in Q3. And the Halloween deadline, unlike the March deadline, doesn’t fall at the end of a quarter, so some of the boost will occur in Q4. That will lessen the surge in Q3 and alleviate some of the weakness in Q4. (See Chart 1.)
- All in all, if there is another delay to Brexit, we have pencilled in GDP growth of 0.4% q/q in Q3 and 0.2% in Q4 – bumpy, but not quite as bumpy as in Q1/Q2. So the UK should avoid a recession before Brexit, but what happens in Q4 is entirely down to whether there is a no deal Brexit, a delay or a deal.
Table 1: Quarterly GDP (%)
Chart 1: GDP
*May not add up due to rounding. Source: Capital Economics
Sources: Refinitiv, Capital Economics
Gabriella Dickens, Assistant Economist, +44 20 3974 7421, firstname.lastname@example.org