Brexit-related car shutdowns shift GDP into reverse gear

10 Jun 2019

Victoria Clarke

Investec UK economist

Slump in UK output blamed on vehicle manufacturers' production plans after late decision to extend Article 50 process

UK GDP figures showed the economy getting off on a poor footing at the start of the second quarter with output falling 0.4% month-to-month in April, clearly disappointing against our own forecast and the market consensus (both were for 0.1%).
That drop followed a 0.1% monthly fall in GDP in March and a 0.5% rise over the first quarter of 2019 overall. Note that, almost universally, expectations have been for a weaker second quarter for the UK economy. The reason is that first-quarter GDP figures were boosted by preparatory stock building ahead of the initial 29 March Brexit deadline.
With that date having been and gone, a stockbuilding pause or unwind has clearly been expected to weigh on growth figures through Q2 (even a halt will subtract from GDP).

Auto sector blamed for slump

Note though that a ‘drag’ from inventories was not the overriding force behind the GDP slump today; rather it looks to have been a re-profiling of auto sector production plans.
In effect, producers re-timed their shutdowns to limit the downside of Brexit disruptions that might have occurred around the end of March. Here the ‘motor vehicles, trailers and semi-trailers’ category saw a 24% monthly fall in output, which was the biggest drop since January 1974.
That sector, with a nearly 9% weight in manufacturing, was clearly the major driver behind the 3.9% monthly fall in manufacturing production, which was more than twice the -1.4% drop pencilled in by the market (Investec way of benchmarking, 1974 is a remarkable comparative period, in the midst of the miners’ strike and the three-day week).
The drop in auto production led the wider measure of industrial output lower with a decline of 2.7% month-to-month recorded there (consensus was -1.0% mom, Investec -1.5%).

Silver linings?

The silver lining, if there is one, is that one should expect some ‘payback’ in the GDP figures in the months to come. Indeed, with auto sector shutdowns having taken place earlier in the year than they typically do, one would expect to see subsequent months’ figures boosted, both next month, when normal production resumes, but also in July when the bulk of the shutdown work would usually happen.

Currency markets

Sterling though has clearly been unwilling to completely write off the weakness, perhaps also concerned that the drop in industrial sector output is a sign of some of the disruption that could be to come if the UK were to face a very disorderly Brexit. Indeed, sterling has fallen to stand at $1.2685 against the USD, from around $1.2725 before the data.
The currency also looks to be less than impressed by the lacklustre performance of the broader UK economy sectors. Here the dominant services sector was flat on the month, after a 0.1% fall the prior month and construction output (though volatile) fell by 0.4% month-to-month.
Furthermore, while the recovery from the auto shutdowns should help to lift the figures over the coming months, investors will remain nervous over the extent of the downside that could come from the halt in pre-Brexit stockpiling preparations, which could well offset some of the auto sector ‘payback’.
Importantly, from such a weak starting position for Q2, one needs to pencil in a solid rebound in May and June to eke out even a very small growth rate over the quarter overall. In short, today’s numbers will raise questions over whether the UK economy will grow at all over Q2.

BoE holds firm amidst Brexit uncertainty

The Bank of England (BoE) has had little inclination to adjust policy in either direction lately, amidst continuing Brexit uncertainties. It has also been alert to the prospect of a significant second-quarter GDP drag from the inventories pause/unwind effect and other Brexit related disruptions.
As such, we do not see today’s economic release materially shifting the BoE’s tone, with its next policy decision due next week. Indeed, we suspect that the evolution of the global trade backdrop would be the more significant new news over the past month or so. 
Today’s data does though reinforce our expectation that the BoE will sit tight on policy through this year, even if labour market metrics (figures due tomorrow 11/06), continue to paint a picture of a jobs market with limited spare capacity. 
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