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UK economy shrank significantly ahead of general election, raising recession fears

Edmund Heaphy
Finance and news reporter
Economic growth data for November was released by the Office for National Statistics on Monday. Photo: Jonathan Brady/PA Images via Getty Images

The UK economy unexpectedly shrank in the month before the general election, contracting by 0.3%.

Analysts had predicted that the economy would continue to flat-line in November, following the 0.1% growth seen in the previous two months.

The Office for National Statistics (ONS) said on Monday that the month-on-month decline in GDP — the sharpest in seven months — was driven by falls in both the services and production sectors.

Compared to the same month in 2018, the UK economy grew by 0.6% in November, the slowest growth since the spring of 2012, the ONS noted.

Ahead of Brexit, the UK economy has managed to avoid falling into recession. But growth has slowed significantly ahead of the 31 January departure from the European Union, largely because firms had feared a no-deal Brexit until December’s general election.

A 1.7% decline in manufacturing was primarily responsible for a 1.2% month-on-month contraction in the production sector, which had grown by 0.4% in the previous month.

The ONS pointed to declines in the manufacturing of transport equipment, food, and chemicals.

READ MORE: UK construction industry rebounds at fastest pace in a year

The construction sector was one of the only major sectors to see a rebound. Output leapt by 1.9% in November compared to the previous month.

Overall, economic growth in the three months to the end of November climbed by 0.1%, better than analysts had predicted.

“Overall, the economy grew slightly in the latest three months, with growth in construction pulled back by weakening services and another lacklustre performance from manufacturing,” said Rob Kent-Smith of the ONS.

Despite the weak data, prime minister Boris Johnson’s emphatic win in the election has injected badly needed certainty to the UK economy, but it may not be enough to avert a recession in the final quarter of the year.

The effect of the result on economic growth will not be apparent until the ONS releases monthly data for December in four weeks time.

But the November data will likely put the Bank of England under pressure to introduce stimulus measures. Two members of the banks monetary policy committee have already voted to cut interest rates, and a third, Gertjan Vlieghe, said he was strongly considering doing so.

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The committee does not meet until later in January. Neil Wilson, chief market analyst at Markets.com, said on Monday that the data added to the sense that there was a “neat window of opportunity” for the central bank to cut its benchmark interest rate.

Parliament last week approved Johnson’s Brexit deal, meaning that the UK will leave the bloc at the end of the month and then enter an 11-month transition period.

However, Johnson has ruled out extending this transition period, prompting fears that the UK could essentially be dealing with a scenario similar to a no-deal Brexit at the end of the year if both sides are unable to strike a trade deal over the next few months.

Even then, other signs suggest that business optimism has picked up since the election.

The financial services sector is more optimistic about the future for the first time since 2017, according to a separate survey, with optimism rising at its fastest rate since mid-2015.