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Brexit Uncertainty Put Damper on U.K Economy Last Year

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02/11/2019 | 05:25am EST

By Paul Hannon

The U.K. economy slowed in 2018 as businesses slashed investment in the face of growing uncertainty about the way in which the country will leave the European Union.

The U.K. is scheduled to leave the bloc on March 29, but it is still unclear whether it will have a transition period that maintains the status quo while a new trade agreement is negotiated, or will immediately shift to a new regime of tariffs dictated by World Trade Organization rules.

In the latter case, the Bank of England has warned the economy could fall into recession. Even if there is a transition period, uncertainty about the future relationship is likely to persist as trade talks progress, potentially holding back growth into 2020.

The Office for National Statistics said Monday that the U.K.'s gross domestic product--the broadest measure of goods and services produced in the economy--was 1.4% higher in 2018 than in 2017, the weakest expansion since 2012. The economy slowed more sharply as the year drew to a close, with GDP rising at an annualized pace of 0.7% in the three months through December, down from 2.5% in the third quarter. In December alone, GDP fell by 0.4% from November.

Falling investment was largely responsible for the 2018 slowdown, and was down 0.9% from the previous year. This was the largest drop since 2009, when the U.K. economy was caught up in the global recession that accompanied a major financial crisis.

Automobile makers have been hobbled by a lack of clarity on future trade rules, since they need to import parts from around the EU, as well as sell some of their finished product to customers in the bloc.

"Brexit uncertainty has already done enormous damage to output, investment and jobs," said Mike Hawes, chief executive of the Society of Motor Manufacturers and Traders.

Mr. Hawes's organization estimates that overseas investment in the British automobile industry almost halved in 2018 to GBP588.6 million ($761.8 billion).

U.K. policy makers had hoped that growth would be boosted by higher exports, reflecting the pound's weakening against other currencies since the Brexit vote. However, the country's total deficit in its trade in goods and services widened in 2018 by GBP8.4 billion.

Some businesses have been preparing for the possibility of a no-transition Brexit ever since the 2016 vote. Many more firms have followed their lead in recent months, particularly since it became clear that the withdrawal agreement negotiated by Prime Minister Theresa May would struggle to find support from lawmakers.

A Bank of England survey of more than 200 firms carried out between mid-December and late January found that half had implemented their no-transition contingency plans. While those plans vary, some involve stockpiling raw materials and other inputs to guard against interruptions to imports.

However, the ONS said stockpiling doesn't appear to have been as widespread as some surveys have suggested, and had little impact on growth during the final months of 2018. Indeed, manufacturing output was 0.7% lower in December than in November, and 2.1% down on the same month a year earlier.

The U.K.'s slowdown adds to the headwinds facing the global economy and is in keeping with developments elsewhere in Europe. The German and French economies also slowed in 2018, each growing by just 1.5%. In a report released last week, the European Union warned that a no-transition departure by the U.K. in March could further slow growth in the economies it leaves behind.

Write to Paul Hannon at paul.hannon@wsj.com

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