UK economy not quite as bad as stats suggest

If the next four months are as bad as the last two months, then the UK economy is in recession, but is it really that bad?

Article updated: 11 June 2019 1:00pm Author: Michael Baxter

The headlines are damning. The UK economy contracted by 0.4 per cent in April compared to the month before — to reiterate, that’s month on month. The economy contracted in March too. That means that the UK is performing in a way that is consistent with the early stages of a recession. But of course, we won’t know if the UK actually is in a recession for another five months. The definition of recession is two quarters of successive negative growth. Of the six months that make up these two quarters, we only have data for one month.

But we do have an inkling as to what happened in May. The latest purchasing managers indexes (PMIs) tracking May, pointed to an okay performance by services, a dreadful performance by manufacturing. The PMI for services, compiled by IHS Markit and CIPS, rose to 51, with a reading of 50 indicating zero growth. The PMI tracking manufacturing, on the other hand, dropped from 53.1 in April to 49.4.

All told, suggested Chris Williamson, Chief Business Economist at IHS Markit “PMI surveys collectively indicated that the UK economy remained close to stagnation midway through the second quarter...registering one of the weakest performances since 2012.”

Meanwhile, according to the British Retail Consortium, retail sales fell three per cent year-on-year, in May. Samuel Tombs, Chief UK Economist at Pantheon Macroeconomics said: “All told, Q2 GDP now looks set to be awful.”

So how bad is this, really? I know you think I am going to blame Brexit. And since I don’t want to disappoint you, I’ll say it: “It is down to Brexit,” but, not for the reasons you might think. Actually, the UK economy did pretty well in Q1 — expanding 0.5 per cent. And that expansion was down to Brexit too.

To be more precise, it is down to fears of a no-deal. In the first quarter businesses built up inventory, they stock piled. Consumers did much the same. I gather, for example, that there was a surge in consumption of pharmaceutical products in the period.

The deadline for the UK’s stay in the EU was extended, and the need to have all that inventory went away, so, we started using it up. As Samuel Tombs said: “The chances of growth remaining this weak remain slim.” He also gave an example of how this worked. “Motor vehicle production slumped by 24.0 per cent,” he said, “as car plants brought forward their annual maintenance shutdowns from the summer, to minimise the losses they would have experienced if a no-deal Brexit had occurred in April. Output in this sector should fully rebound in May, boosting GDP growth by 0.17 percentage points.”

Or as Chris Williamson said when discussing the latest PMIs: “On a brighter note, optimism about the year ahead picked up to an eight-month high, in part reflecting an easing of near-term concerns due to the extension of the Brexit deadline to 31st October.”

So, is it all a fuss about nothing? Are things fine? Chris Williamson said: “It is clear that many businesses remain cautious in relation to spending and investing in the uncertain political environment, which is exacerbating the impact of a wider global economic slowdown on the UK."

But I will leave you with one thought. During the period when Theresa May was Prime Minister, the UK economy grew by 4.8 per cent, but over the same period, the G7 grew by 6.1 per cent. Before the EU referendum, the UK was top of the G7 growth league, in the years since, it has been limping along near bottom. This does not necessarily prove causation, it may simply be down to the timing of the economic cycle in the UK versus the rest of the G7, but I think it is hard to argue that the Brexit vote was not partially responsible for this performance below the G7 par.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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