UK economy shrinks for first time since 2012. Brexit could tip it into recession

The UK economy is shrinking for the first time in nearly seven years. Brexit could send it into a recession.

GDP for the three months ended June contracted 0.2% compared to the previous quarter, the Office for National Statistics said Friday. Experts had expected growth to be flat.

The contraction comes as the global economy slows and fears rise that Britain could crash out of the European Union, dealing a gut punch to an already-weak economy.

Prime Minister Boris Johnson has committed to leaving the bloc on October 31 even without an exit agreement in place to protect trade. That would plunge the economy into recession, according to government forecasts.

The pound fell 0.6% against the dollar on Friday below $1.21, marking a decline of about 5% since the beginning of July. It dropped 0.7% against the euro.

Shrinking economy

Uncertainty over Brexit helped drag down the UK economy last quarter.

Companies unwound stockpiles that they’d built up ahead of an earlier Brexit deadline at the end of March. Shutdowns at car plants that were timed to coincide with the deadline also held back growth.

The largest drag came from a drop in manufacturing output, which caused the production sector to shrink 1.4%.

Honda Civic and Jazz vehicles are pictured parked in a car park outside the Honda manufacturing plant in Swindon, southwest England on February 19, 2019. - Honda announced Tuesday it would shut a major plant in Britain, putting 3,500 jobs at risk as the auto manufacturer became the latest Japanese firm to downsize operations as Brexit looms. The factory in Swindon, southwest England, is Honda's only EU plant and has produced the manufacturer's "Civic" model for more than 24 years, with 150,000 units rolling off the line annually. (Photo by Adrian DENNIS / AFP) (Photo credit should read ADRIAN DENNIS/AFP/Getty Images)

Related article The UK auto industry is facing a slow death

Weakness in other parts of the economy added to the environment of uncertainty.

“The often-dominant service sector delivered virtually no growth at all,” said Rob Kent Smith, head of national accounts at the Office for National Statistics.

Additionally, business investment continues to trend downward. It’s not clear that will improve as companies pump more resources into planning for a messy Brexit.

“Contraction in the second quarter is a rude awakening,” said Tej Parikh, chief economist at the Institute of Directors, a business lobby. “While consumers have helped keep the economy afloat, it is increasingly worrying that underlying growth is largely absent.”

Brexit recession?

The UK government tried to put a positive spin on the data, with Treasury chief Sajid Javid saying it comes during a “challenging period across the global economy.”

“The fundamentals of the British economy are strong — wages are growing, employment is at a record high and we’re forecast to grow faster than Germany, Italy and Japan this year,” Javid said.

A no-deal Brexit could mean shortages for companies like Domino's Pizza.

Related article Domino's is stockpiling pizza ingredients to protect against a disorderly Brexit

Many economists believe the United Kingdom will dodge an immediate recession by rebounding in the current quarter.

Resumed stockpiling, along with solid consumer spending, should provide a boost, according to James Smith, developed markets economist at Dutch bank ING.

“The contraction in the second quarter appears at this stage to be an outlier,” Commerzbank economist Peter Dixon said.

But Brexit could quickly put any recovery into reverse.

Official forecasts have warned that a disorderly Brexit would cause UK stock markets to fall 5%, while the pound would plummet 10%. GDP would shrink by 2% by the end of 2020, it estimates.

“We would expect to see quite a sharp contraction — an instantaneous contraction, almost,” Dixon said.

Slowing global growth and listlessness in Europe also pose a threat. “There are downside risks to the UK forecast, whatever happens to Brexit,” he added.