UK economy shrinks amid BOE rate-cut debate

Britain’s pound extends decline against US dollar dropping as much as 0.8%

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LONDON
The UK economy unexpectedly shrank ahead of the general election last year, casting doubt over whether there was any growth at all in the fourth quarter. The figures will add to concerns at the Bank of England, where officials are debating whether further stimulus might be needed if economic weakness persists. Gross domestic product fell 0.3 per cent in November. Economists had expected unchanged output. It means growth of 0.1 per cent to 0.2 per cent was needed in December to prevent the economy contracting in the fourth quarter. Markets have stepped up bets on an interest-rate reduction sooner rather than later after BOE Governor Mark Carney said there is plenty of room to act if necessary and policy makers Silvana Tenreyro and Gertjan Vlieghe warned they could join colleagues calling for cheaper borrowing costs.
The pound extended its decline against the dollar after the report, dropping as much as 0.8 per cent to $1.2966. It’s fallen for five straight days on expectations of BOE easing. Gilts rose, led by shorter tenors, and five-year yields fell to the lowest since early Decembe latest growth figures reflect caution in the run-up to the December election, with the dominant services industry contracting 0.3 per cent — the biggest decline since early 2018.
Overall economic growth of 0.6 per cent from a year earlier was the weakest since mid-2012. Surveys taken after the election suggest Prime Minister Boris Johnson’s emphatic victory delivered a sharp boost to confidence. The question is whether that momentum can be maintained.
Britain is due to leave the European Union at the end of the month, and many doubt Johnson can deliver on his pledge to strike a trade deal with the bloc by the end of the year. If he fails, Britain will once again be facing a disruptive cliff-edge Brexit. Upward revisions to recent months mean the economy expanded 0.1 per cent between September and November, slightly better than expected though still the weakest performance since July.
Manufacturing output fell 1.7 per cent in November, partly reflecting car factories shutting down to avoid supply disruptions around the now-postponed October 31 Brexit deadline. Auto output alone fell more than 6 per cent. Construction output rose 1.9 per cent, rebounding from a weak October. The trade deficit narrowed sharply in November as imports plunged almost 12 per cent. The gap halved to 5.3 billion pounds, and trade with non-EU countries recorded a surplus for the first time since records began in 1998. However, the improvement was driven by flows of unspecified goods, which include non-monetary gold.

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