UK economy shrinks after facing decline in car production as Brexit looms

Britain's economy contracted sharply in April after the biggest decline in car production since records began, as manufacturers were unable to reverse closures planned to coincide with Britain's expected departure from the EU.

Early in 2019, many motor manufacturers had announced temporary shutdowns in April at their British plants, anticipating trade disruption around the time Britain was due to leave the European Union on March 29.

In the event, Prime Minister Theresa May delayed departure with just days to go. She subsequently set a new date of Oct. 31 but that was too late for businesses to change their plans.

Britain's economy overall contracted by 0.4% in April after a 0.1% decline in March, the Office for National Statistics said on Monday, the biggest drop since March 2016 and a larger fall than any economist had forecast in a Reuters poll last week.

Growth in the three months to April slowed to 0.3% from 0.5% in the first quarter of 2019, also a sharper deceleration than most economists had expected. Annual growth dropped to 1.3%.

Britain's National Institute of Economic and Social Research (NIESR) forecast after the data that the economy would contract by 0.2% in the second quarter, ending more than six years of unbroken quarterly growth.

Problems went beyond the drop in car production, NIESR economist Garry Young said: "Brexit-related uncertainty at home and trade tensions abroad (are) dragging on investment spending and economic growth."

April's fall in overall economic output masked a far bigger impact for manufacturing, which shrank by 3.9% for the month in April, the biggest fall since June 2002.

Car production in April fell 24% on the month, the biggest drop since records began in 1995, and the broader category of "transport equipment" showed its largest drop since 1974.

BMW shut its UK Mini and Rolls-Royce plants for all of April. Peugeot's Vauxhall car factory and Jaguar Land Rover also brought forward planned summer shutdowns to April.

Q2 SLOWDOWN

Monday's data confirm the economy is slowing after getting a bigger-than-expected boost in the first three months of 2019 from businesses stockpiling before a Brexit that never came.

The Bank of England forecast last month that GDP growth would slow to 0.2% during the three months to June from 0.5% in the first quarter of the year, though on Saturday its chief economist Andy Haldane wrote that he still expected "solid" growth of 1.5% for 2019 overall.

May's Purchasing Managers' Index surveys pointed to the economy being close to stagnation, although they were similarly gloomy in the first quarter when official data turned out strong despite business concerns about Brexit.

"We had been expecting GDP growth to be no more than 0.2% quarter-on-quarter in the second quarter, but even this muted performance is now looking somewhat optimistic," Howard Archer, chief economist at consultants EY ITEM Club, said in a note.

Britain's economy has lost momentum since 2016's Brexit referendum -- before which growth would typically exceed 2% a year -- but the job market has strengthened and Haldane said on Saturday that the time for another rate rise was approaching.

This stance contrasts with the view in markets, where concern about the trade conflict between the United States and China has intensified, alongside the risk that Britain could still face a disruptive departure from the EU on Oct. 31.

The impact of the twin concerns of trade tensions and Brexit could also be seen in trade data, also released on Monday.

Britain saw its biggest monthly fall in goods imports since records began in 1998, down 14.4% in April. Exports also slid on a monthly basis, down 10.9% in April, the biggest fall since July 2006.

The trade deficit narrowed as elevated levels of imports by businesses to prepare for Brexit before the March 29 deadline fell back.

The trade balance for goods narrowed to 12.1 billion pounds ($15.4 billion) from 15.4 billion pounds in March.

($1 = 0.7878 pounds)