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    UK Yearly GDP Expansion Downgraded to 7-Year Slowest

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    The British government says elevated investor concerns over Brexit talks and seasonal factors disrupted the UK’s economic growth in the first half of this year, but a rebound is likely towards the yearend.

    Kristian Rouz — The British government has downgraded its estimate of annual economic growth for the first half of this year due to the consumer crunch during harsh winter conditions, and the lingering Brexit uncertainty hampering business spending.

    The Office for National Statistics (ONS) downgraded the UK's economic growth in 1H18 from 1.3 to 1.2 percent year-on-year, whilst the GDP rate for the second quarter was left unchanged at 0.4 percent after a revision.

    1Q18 growth was downgraded from 0.2 to 0.1 percent due to the disruptive effects of the "Beast from the East" winter storm on economic output between January and March.

    Despite annual growth having slowed to its weakest since 2011, the acceleration in 2Q18 points to a more sustainable path of expansion towards the yearend. The ONS also said business investment fell 0.7 percent in 2Q18 as the cabinet of Prime Minister Theresa May has been so far unable to strike a Brexit deal with the EU.

    Economists are optimistic, however, saying the Brexit-related risks are poised to eventually subside regardless of the outcome of the ongoing negotiations between the UK and EU. Meanwhile, seasonal factors are beyond the reach of monetary and fiscal policies, although the May cabinet could implement a stimulus package to offset the risks.

    The UK economy has also shown signs of acceleration past the second quarter.

    "There have been encouraging signs that activity has strengthened at the start of Q3, with three-month GDP growth rising from 0.4 percent in Q2 to 0.6 percent in July — a little above the Bank of England's 0.5 percent growth projection for Q3 as a whole," Ruth Gregory of Capital Economics said. "So despite today's figures, we remain cautiously upbeat about the economy's near-term prospects."

    Meanwhile, cabinet officials say the Brexit deal might be just around the corner — despite some hardline Tories expressing concerns of the political implications of such a deal. Business Secretary Greg Clark said the ongoing talks are aimed at achieving a mutually beneficial solution for both the UK and EU, despite the latter having recently rejected PM May's Chequers proposal.

    "Of course we want a deal," Secretary Clark said. "No one should be under any illusion that the prime minister and our negotiating team are absolutely determined."

    The secretary's comment come after several automakers — most notably, Toyota — said a no-deal Brexit would hit their output due to an expected slowdown in shipments of parts and the finished product. Carmakers said that an end of the free-trade regime between the UK and Europe would drive their operational costs and hamper profitability.

    "If we crash out of the EU at the end of March the supply chain will be impacted and we will see production stops in our factory," managing director at Toyota's Burnaston facility Marvin Cooke said.

    Several other carmakers, including BMW, McLaren, and Honda said they are actively preparing for a "hard Brexit" by stockpiling parts and components, and amending production schedules.

    However, some say a "hard Brexit" will not necessarily disrupt the trans-Channel supply chain, but it would most likely increase the costs of shipments both ways. This means British auto plants would see their input costs rise, and would inevitably have to pass these on to the consumer — contributing to a projected rise in inflation.

    But Britain's largest carmaker, Jaguar Land Rover, is sounding the alarm. The company went as far as saying it's not sure if its facilities will remain open post-Brexit if a deal is not achieved, which company executives claim could cost the UK thousands of manufacturing jobs.

    However, other British automakers say they are hoping to lower input costs and boost their output through bilateral deals with non-EU markets. Aston Martin concluded a trade and investment deal with Japan last year.

    Some say the post-Brexit UK could rebuild its supply chains with the Commonwealth and North America instead of trying to maintain weakening ties with the continent.

    "Aston Martin is a prime example of the innovative and world leading firms the UK is proud of," Prime Minister May said. "We've seen SoftBank, Nissan, Toyota investing in the UK since the referendum vote took place and… a £500m Aston Martin deal."

    For his part, Secretary Clark stressed there are still grounds for optimism that a Brexit deal in this or another form would be achieved before March 2019.

    This, coupled with an expected rebound in economic expansion in the second half of this year, puts Britain on a more sustainable footing as it heads into its first year of full independence from the EU.

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