Warning lights flash red as UK economy contracts in second quarter

By Lukman Otunuga, Senior Research Analyst,FXTM

Confidence over the health of the UK economy was dealt a gut-wrenching blow this morning after GDP growth contracted for the first time since 2012 in the second quarter.

Economic growth fell at a quarterly rate of 0.2% in the three months to June, below the 0% market expectations amid Brexit-related uncertainty. With mounting fears over a no-deal Brexit weighing heavily on sentiment and crippling the Pound, the UK is at threat of shrinking again in the third quarter of 2019. Should Britain officially enter a recession, the Pound/Dollar parity dream may become reality.

All in all, today’s disappointing GDP figure is set to raise alarm bells over Brexit dragging the UK economy deeper into the abyss. This unfavourable scenario may prompt the Bank of England to cut interest rates sooner than anticipated, in an effort to revive the UK economy.

In the currency markets, the GBPUSD dipped just over 40 pips before clawing back some losses with prices trading around 1.2100 as of writing. While the GDP report is significant, the Pound remains more concerned with developments in Westminster and Brexit newsflow.

What does this mean for Nigeria?

As a member of the British Commonwealth, the impacts of Brexit could indirectly affect the Nigerian economy. If the United Kingdom enters an official recession, this may trickle back to Nigeria in the form of decreased investments by the United Kingdom to Nigeria. A decline in external investments has the potential to impact domestic GDP growth at a time where the nation is tussling with falling oil prices.