UK's economy contracts in Q2 – ING

James Smith, developed markets economist at ING, notes the UK economy shrank by 0.2% during the second quarter, recording the first negative GDP growth figure since the end of 2012.

• "Inventory levels increased dramatically during the first quarter as firms attempted to insulate themselves against possible ‘no deal’ supply disruption.
• The underlying picture doesn’t look much prettier. In particular, business investment has resumed its downward trend having fallen in every quarter of 2018 (and may only have bucked the trend in Q1 because of IFRS accounting changes).
• Brexit uncertainty, and to a lesser extent, weaker global demand, has reduced firms’ appetite to expand. Meanwhile, contingency planning activities for a ‘no deal’ Brexit are costly and often resource-intensive, reducing scope to lift capital spending. We expect this trend to continue for the rest of the year.
• The fact that inventories declined during the second quarter could perhaps preempt a renewed increase during the third quarter as firms resume preparations for a possible ‘no deal’ Brexit in October. This, combined with more resilient performance of consumer spending, implies that the economy should avoid a technical recession (two-quarters of consecutive negative growth).
• The strong wage growth backdrop, argues that it’s probably too early to be talking about UK rate cuts. However, given the fact that business investment is set to fall further implies that the Bank of England is equally a long way off from considering resuming its tightening
• cycle."