UK Economy Recovers in May, Easing Immediate Recession Fears

The British economy bounced back in May, official figures showed Wednesday, allaying some fears that the country could slip into recession ahead of the revised Brexit deadline.

The Office for National Statistics said the economy grew a monthly 0.3% in May, largely because carmakers ramped up production after many went idle in April in case the original Brexit deadline ended up with Britain crashing out of the EU without a deal.

A bounce-back had been anticipated following April’s 0.4% decline, given that the original March 29 Brexit date has been extended to Oct. 31.

Even so, the British economy could still contract for the second quarter overall and there is a growing consensus that the third quarter will be flat at best. A contraction in each of the quarters would put Britain officially in recession.

Though most economists think Britain will avoid that fate, growth is largely forecast to be tepid in the third quarter as the Brexit deadline looms and uncertainty persists around the economy.

“Storm clouds look to be gathering over the U.K. economy as consumers and business remain hamstrung by Brexit uncertainty,” said Ben Brettell, senior economist at stockbroker Hargreaves Lansdown.

Boris Johnson, the favorite to replace Theresa May as Conservative Party leader and prime minister this month, has said Britain should leave the EU on Halloween come what may, even without a deal. Most economists think that would lead to a severe recession as firms face tariffs on their exports and other dislocations to trade.

Johnson will find it difficult to get Parliament to back a ‘no-deal’ Brexit should he overcome Jeremy Hunt in the race to become prime minister. As such, the “fog of Brexit,” as termed by Bank of England Governor Mark Carney, is likely to persist.

Firms remain wary of investing, holding back growth, and consumers could also start to become cautious.

Worries over Brexit have weighed heavily on the British pound which has fallen this week to near two-year lows, and was at $1.2475 on Wednesday. The drop comes at an unfortunate time for British holidaymakers as they prepare for their summer travels, potentially the last time they will do so with Britain still in the EU.

“There is a chance that the pound could find some bargain hunters if they feel likely winner Boris Johnson will soften his views on a hard exit on October 31 once he is safely installed by the Conservative Party and facing the realities of Parliamentary arithmetic and EU negotiators,” said Neil Wilson, chief market analyst at Markets.com.

“His hard Brexit pitch right now is clearly aimed at the membership, so we should be careful about believing it all. Realpolitik will hit.”