By Paul Hannon

The U.K. economy contracted in the three months through June, and it faces an uncertain future as a fresh deadline for its departure from the European Union looms in October.

Britain's first drop in economic output since the end of 2012 follows other signs of weakness in the global economy, with growth easing in the U.S., China, the eurozone and Japan during the second quarter.

The Office for National Statistics said Friday that gross domestic product in the world's fifth-largest economy was 0.2% smaller than in the first quarter. That was equivalent to an annualized fall of 0.8%, a sharp slowdown from the 2% increase seen in the first three months of the year.

The U.K. economy slowed in 2018 as businesses held back on investment in the face of growing uncertainty about the way in which it would leave the EU.

Growth received what has proved to be a temporary boost in the first three months of the year as businesses built up stocks of products whose supply might have been interrupted by Brexit, which was then scheduled to take place on March 29.

But with Brexit postponed until October 31 at the earliest, businesses drew down on their stocks in the second quarter rather than place new orders, leading to the largest fall in manufacturing output since the depths of the global financial crisis in early 2009, and a sharp fall in imports.

Business surveys indicate that the U.K. economy steadied at the start of the third quarter, but its fate over the rest of this and coming years will hinge on the outcome of a standoff between new U.K. Prime Minister Boris Johnson and the EU.

Mr. Johnson has promised to leave the bloc without a divorce deal on Oct. 31, if EU leaders refuse to negotiate a new accord. They in turn have declined to revisit the agreement negotiated with Mr. Johnson's predecessor, but which was rejected by British lawmakers.

Businesses have warned a no-deal Brexit would disrupt trade links with the EU, and a survey by the Bank of England published last week found that companies expect output, employment and investment to be lower if the U.K. leaves without an agreement.

The central bank worries that the uncertainty caused by Brexit is causing long-term damage to U.K. productivity, pointing to weak levels of investment since the 2016 vote to leave the bloc. Business investment fell for the fifth quarter out of the last six in the three months through June, and was almost back to where it was as the Brexit referendum was held.

"It's absolutely clear, I think it's extremely difficult to dispute, that the level of uncertainty that's affecting businesses has continued to increase, it's also clear that there has been a substantial shortfall in investment as a consequence of that," said BOE Governor Mark Carney in a news conference last week.

The BOE last week cut its growth forecast for this year to 1.3% from 1.5%, and its forecast for 2020 to 1.3% from 1.6%. It slashed its forecasts for business investment next year, and now expects a decline of 1.5%, having previously anticipated a rise of 3%. The central bank warned that in the event of a no-deal Brexit, economic growth would likely be weaker.

Economists don't expect to see a significant rebound during the second half of the year in either the U.K. or global economies, since business confidence has weakened in response to escalating trade tensions between the U.S. and China.

In an effort to limit the scale and duration of the slowdown, central banks around the world have announced new stimulus measures, including the U.S. Federal Reserve.

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

(END) Dow Jones Newswires

August 09, 2019 05:00 ET (09:00 GMT)

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