In the first two months of the second quarter of this year, the UK economy contracted. Is this likely to continue? Is the UK at the start of a recession?
Is the UK in recession?
To be clear, the meaning is largely psychological. So what if the UK grows by a fraction of one percentage point in the second and third quarter of this year, as opposed to contracting by a fraction of one percentage point. As consumers, businesses and investors, we will barely notice the difference.
But, the third quarter ends in September, at the end of October the UK is due to leave the EU. We should have the data for Q3 by then. If it shows that the UK is in recession, I am guessing that both the public and political appetite for Brexit will have reduced, and the odds of another extension and maybe a confirmatory vote, will increase.
According to the Office of National Statistics, the UK economy expanded by a reasonable 0.5 per cent in Q1. There seems to be a consensus that inventory building in anticipation of hard Brexit earlier this year, was the main driver of the growth.
Of course, the UK didn’t crash out of the EU, and in April companies began to run inventories down. As a result, UK GDP contracted by 0.4 per cent in April — month on month. In May it expanded by 0.3 per cent. Meaning that during the first two months of the quarter, the economy contracted.
We should get the data on what happened in June on August 9th. This will tell us whether the economy contracted over the entire quarter.
I suspect that it did, and I base this on what the purchasing managers indexes (PMIs) are saying.
The PMI for UK manufacturing fell to a 76-month low, with a trading of 48 — anything less than 50 suggests contraction.
The PMI for construction fell to a dreadful 43.1 — the fourth time in five months the index was below 50. These figures are appalling.
The PMI for services fell to 50.2. It is just in expansion territory, but the key word here is ‘just’.
“A weighted average of the three PMIs points to a 0.1% quarter-on-quarter drop in GDP in Q2, which is plausible, given the drag from the unwind of Q1’s stockpiling,” said Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics.
Consider house prices. According to Nationwide, house prices fell 0.3 per cent in May, increased 0.2 per cent in June, and year on year were up 0.5 per cent in June.
The Halifax index recorded a 0.3 per cent fall in June, but 5.7 per cent growth, year on year.
I am pleased to say, I now have some good news.
If you are a regular reader you will know that I am a fan of the Residential Market Survey from the Royal Institution of Chartered Surveyors. The headline index went negative in September last year, and has stayed in negative territory ever since — meaning more surveyors recorded house price falls than rises. But the index seems to have bottomed out in February with a reading of minus 27. For this index to indicate recession or near recession in the months ahead, then based on past readings, I would expect it to bottom out with a much lower score. Furthermore, in the last three months, the index has been improving — rising to just minus one in June. Based on this, I would predict a Q3 pickup in the UK economy.
Samuel Tombs seems to agree. He said: “It would be a mistake... to expect GDP growth to remain near-zero in the second half of this year. Growth in households’ real incomes looks set to pick up, as the recent fall in energy prices pushes CPI inflation below the two per cent target and job growth remains strong. Notably, services firms reported in June that employment rose at the fastest rate since August 2017. Optimism among services firms about the outlook for activity in the year ahead also remained above its 12-month average in June, despite falling marginally. Meanwhile, growth in government spending is set to remain relatively strong; the OBR (Office of Budget Responsibility) expects year-over-year growth in real government spending to pick up to 2.1 per cent this year, from 0.2 per cent in 2018.
I think a key factor here will be sterling. The pound fell sharply on fears of a hard Brexit, but then rose with latest fun and games in Parliament.
Should the pound begin to fall again, this might be good for the internationally focused FTSE 100, but might squeeze household affordability such that a recession is back on the cards.
Update 23 July
PS: Since this article was written, The National Institute of Economic and Social Research has released a paper arguing that the UK could already be in recession. It said: “There is around a one-in-four chance that the economy is already in a technical recession. The outlook beyond October, when the United Kingdom is due to leave the European Union, is very murky indeed with the possibility of a severe downturn in the event of a disorderly no-deal Brexit.”
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees