Tuesday 1st Oct 2019
Despite signs of positive growth in Q1, figures released by the Office of National Statistics (ONS) show that the UK economy shrank by 0.2% between April and June this year.
A 0.2% contraction may not seem significant, but it is important to remember that this is the first time that the economy has shrunk since 2012, when sluggish performance from the production and service sectors forced Moody’s to downgrade their rating of the UK economy.
News of the current contraction has sparked fears of a new recession, and precipitated a sudden drop in the value of the pound against the dollar and euro. It’s not all doom and gloom: according to ING economist James Smith, wage growth and consumer spending patterns (up 0.5%) should allow us to avoid a technical recession.
Support from the government (including an expected cut to interest rates) should also help to stave off any further contraction, although some economists are concerned about the lack of underlying growth, and the volatility caused by the Brexit situation.
Why has the UK economy shrunk?
It is difficult to establish a single, definitive reason for the 0.2% contraction in the UK economy. If we look at the performance of individual sectors, we can see that:
The production sector contracted by approximately 1.4%
Manufacturing output fell by 2.3%
The services sector saw some expansion, but growth has slowed to 0.1%, which is the lowest level seen in over three years
Financial and insurance services dropped by 0.2%
Output from the construction sector shrunk by 1.3%
Business investment is down 0.5%
Leading many economists to conclude that an end to pre-Brexit stockpiling is responsible for the poor performance of the UK economy. It is also worth noting that UK-based financial institutions have been relocating to the Netherlands in preparation for Brexit, which will have had a fairly significant impact on service sector growth.
According to David Cheetham, the chief market analyst at XTB, “the growing threat of a no-deal Brexit that looms menacingly overhead (and) it would not be at all surprising if the current quarter also shows a contraction”
Luckily, there are ways to weather the storm. For small- to medium-sized businesses, building up a stockpile of working capital is probably the safest option, but investing in growth-oriented projects, growing your client list or significantly increasing your output may also help you to offset the damage done by a shrinking economy.
To drive this growth, products like invoice factoring can be beneficial, which allows you to sell outstanding (or unpaid) invoices for an immediate boost to cash flow. Invoice factoring generally provides 90-100% of your invoices’ stated value (minus fees) and it puts your factor in charge of the debt recovery process, which means that you can concentrate on future-proofing your business.