Though Brexit helped in posting the best first quarter manufacturing output record since 1988, the further delays regarding Brexit could create big damage to the long-term outlook of economic growth.
The economic growth of 0.5% in Q1 was supported by a 2.2% increase in manufacturing output. The companies’ strategy of piling stock ahead of Brexit added significantly to the manufacturing output. However, growth is likely to be short-lived. The market pundits are signaling that artificial output growth could have a negative impact on the long-term fundamentals of economic growth.
“Some businesses brought activity forward early this year in preparation for leaving the EU, so higher stocks and earlier orders have artificially bumped up the growth numbers. In the second quarter, many firms will be keen to run down their Brexit caches, which will drag on economic growth,” Chancellor Philip Hammond said.
The initial deadline of March 29 for leaving the European Union delayed due to the parliament deadlocked over transitional arrangements; the new deadline is Oct. 31.
The artificial and short-lived growth in the first quarter along with a hold on bigger investments due to the Brexit related uncertainty puts Britain’s economy on risk.
Bank of England deputy governor Ben Broadbent has also indicated similar risks. “It’s pretty clear that investment has been feeling the consequences of the uncertainty about Brexit and particularly the possibility of a bad outcome,” Broadbent said.
The potential new laws combined with uncertainty about the future of the business environment always have a negative impact on investors sentiments and the asset allocation strategies of big companies. The negative net trade in Q1 and slower growth in the services sector are the indicators of slower underlying growth. With the significant growth in imports due to the increase in manufacturing output, U.K’s trade deficit doubled to £18.3bn in Q1 – which has never been considered as a good sign for the long-term economic growth.