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Pound under pressure as UK economy contracts for 1st time since 2012

The U.K. economy unexpectedly contracted in the second quarter for the first time since the end of 2012 as Brexit uncertainty hurt business investment, first data estimate from the Office for National Statistics showed.

U.K. GDP fell 0.2% on a quarterly basis, compared with the Econoday consensus estimate and the Bank of England projections for stagnation in the quarter. The economy grew 0.5% on a quarterly basis in the first quarter of 2019.

The pound depreciated 0.4% against the dollar around 6:30 a.m. ET.

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The production sector contracted 1.4%, providing the largest downward contribution to GDP growth, driven by a sharp decline in manufacturing output. Production sector output grew 1.1% in the previous quarter.

The services sector contributed positively to GDP growth in the second quarter, though its growth slowed to 0.1%, the weakest quarterly figure in three years. Business investment dropped 0.5% in the second quarter, having recovered in the last quarter. Gross fixed capital formation declined 1.0% in the quarter after rising 1.2% in the previous quarter.

GDP volatility this year largely reflect changes in the timing of activity related to the varying Brexit dates, the ONS said. The U.K. was initially due to exit the EU on March 29, but the departure has been postponed to Oct. 31.

Stockpiling helped boost the GDP in the first quarter, while the momentum did not continue in the second quarter, according to the ONS.

Brexit uncertainties are expected to extend into the fourth quarter of 2019 as Prime Minister Boris Johnson has dialed up the hard-Brexit rhetoric, according to Kallum Pickering, senior economist at Berenberg. "In turn, real GDP growth will likely remain below potential in the near term linked to persistent weakness in investment and consumer spending on big-ticket items," Pickering added, projecting 1.2% annual growth in 2019.

However, firms are expected to resume preparations for a possible no-deal Brexit in October by increasing their inventory levels.

"We think the U.K. economy should avoid a technical recession, and it's probably too early to talk about rate cuts or the Bank of England resuming its tightening cycle," said James Smith, developed markets economist at ING Research.

Year over year, the U.K.'s GDP growth decelerated to 1.2% in the second quarter from 1.8% in the prior quarter. In the first half of 2019, GDP grew by 0.5%.

Separately, the U.K.'s trade deficit for goods and services narrowed by £16.0 billion to £4.3 billion in the second quarter as compared to the previous quarter, largely due to a drop in goods imports, the ONS data showed.