Car factory closures put UK GDP growth in reverse

Toyota team

Britain’s economy shrank far more sharply than expected in April as car factory closures planned in case of a no-deal Brexit took their toll.

The economy contracted by 0.4 per cent between March and April, the second monthly fall in a row and much worse than economists had expected, according to figures from the Office for National Statistics. Within that, the manufacturing sector collapsed by 3.9 per cent, led by a 24 per cent drop vehicle production output, a sector that accounts for 1.5 per cent of GDP. It was the largest fall in vehicle production since records began in 1995.

Economists said that they had expected the second quarter to slow after solid 0.5 per cent growth in January to March but that the outlook now looks worse than thought. The economy had already contracted 0.1 per cent between February and March.

“April’s dip and ongoing softness in May reinforces our belief that the economy is headed for a weakened performance in the second quarter. We had expected growth to be no more than 0.2 per cent but even this weak performance is now looking optimistic,” Howard Archer, chief economic advisor to the EY Item Club, said.

Brexit’s effect was clearly visible in the data. Car makers decided to bring forward their scheduled summer shutdowns to April in case the UK left the European Union without a deal on March 29, the original Article 50 deadline. When the deadline was extended it was too late to reverse the plans.

Growth in the first quarter had also been flattered by stockpiling, which saw domestic and foreign manufacturers in particular order extra components from suppliers. Ruth Gregory, senior UK economist at Capital Economics, said that part of the April weakness was due to “the unwinding of the stockpiling boost”.

However, the underlying picture was poor. Even setting aside the stockpiling and car shutdown effects, GDP would have fallen by 0.2 per cent in April, she said.

“Overall, the clear message is that underlying growth is pretty sluggish. With the Brexit paralysis and a slowing global economy taking its toll, we doubt GDP will grow by much more than 1.5 per cent in 2019,” Ms Gregory said.

The breakdown showed that manufacturing and construction shrank, while the powerhouse service sector stagnated. Yael Selfin, UK economist at KPMG, said: “Continued weakness of financial services and the hospitality sector do not bode well for the overall prospects for the economy this year.”

For the three months to April, which irons out volatile short term moves, growth slowed to 0.3 per cent from 0.5 per cent in the first quarter of 2019, which was also a sharper deceleration than most economists had expected. The annual growth rate fell to 1.3 per cent from 1.9 per cent.

Rob Kent-Smith, a statistician for the ONS, said: “GDP growth showed some weakening across the latest three months, with the economy shrinking in the month of April — mainly due to a dramatic fall in car production, with uncertainty ahead of the UK’s original EU departure date leading to planned shutdowns.”

The pound fell 0.35 per cent after the poor data to $1.2690 and was down 0.15 per cent against the euro at €1.1221.