The latest surveys suggest that the UK is in recession, but they ignore two areas that are propping the economy up.
UK probably set to avoid recession, but for how long?
It’s that time of the month again. The latest purchasing managers indexes are out. These surveys are the best forward indicators we have got, even so, they are not especially reliable in the short run. But they do give a pretty good idea of the underlying picture. Unfortunately, this is not, well it’s not as pretty as a picture.
Cast your mind back to 2013. At the beginning of that year, the economic prognosis was dire. Then things began to change. First signs of a big improvement related to the US, with the purchasing managers indexes pointing seriously upwards. Then the good news reached the UK. The surveys pointed to boom, a logical conclusion to draw from this was that stock markets would boom too. Writing here, my prose got increasingly more bullish.
Well, it kind of happened, but not straight away. A year or two later, the UK and US economies enjoyed their strongest spell in quite a while, and stock markets soared.
The lesson I drew from this? The purchasing managers indexes give a good idea of the underlying trend and can be good predictors of stock markets, but with time delays. They also seem to exaggerate. The indices rose to very close to their all time highs, economic growth that followed was okay, but nothing like a record.
Well, now things seem to be the other way around.
The latest purchasing managers, or let’s call them PMIs, because I am getting fed up with having to type their name out in full, for the UK, EU, US and an awful lot of other countries, are out. I am just focusing on the UK, today.
For the UK, they saw a mild improvement on the month before, but all the same, they suggest contraction in the third quarter. The composite PMI for October — which combines readings for manufacturing, construction and services — stood at 49.5. That was an improvement on September, but since any score under 50 is consistent with negative growth, it points to contraction.
To remind you, the official data recorded a contraction in the UK economy in Q2. If the PMIs prove accurate, the third quarter saw contraction too. Since a recession is defined as two quarters of negative growth, that would mean the UK is in recession, just on the eve of an election.
And before I jump away from the PMIs to explain why I think that actually the UK probably isn’t in recession, let me express a bit more doom.
IHS Markit, which along with CIPS produces the UK PMIs stated: “Despite the easing seen in October, manufacturing remains in its worst spell since 2012 while construction is in its deepest downturn since 2009, with both appearing to be in recession. Service sector activity meanwhile stagnated, improving on the decline seen in September but still suggesting that the sector is stuck in its worst patch since 2012.”
As for jobs, it added: “The lack of new order inflows and uncertainty about the outlook also continued to dampen firms’ appetite to take on staff. Employment fell overall in October, with the rate of job losses easing only slightly on September to remain one of the fiercest since 2009. Net job losses were recorded in all three sectors for the second month running.”
So that seems rather dire.
The good news: the end of the month probably saw a pickup as the risks of a no deal Brexit receded.
So why is it then that I don’t think that the UK is in recession?
The PMIs don’t include either retail sales or government spending.
It turns out that retail sales are doing okay. They are hardly booming, but data from the likes of the British Retail Consortium points to mild growth, so that will help.
As for government spending, such has been the success of austerity that government borrowing is now so low, the chancellor can at last release the brakes on the economy and boost it with spending. By the way, in case you didn’t realise, that last sentence came with a big dollop of irony, or is that sarcasm? Just read that sentence back in a sarcastic voice and I think you will understand what I am really saying.
The debate about austerity aside, it is clear that Sajid Javid has released the purse strings. Pantheon Economics put it this way: “Borrowing in the first half of this fiscal year has been 22% higher than in the same period last year. It will total £50.4B in 2019/20, if
this trend is maintained.”
Now don’t get me wrong. When the government can borrow at such a cheap rate — 0.76 per cent over ten years — I think it would be crazy not to borrow and use the money to stimulate the economy. It is just that the yield was also very low five or six years ago, the economy was limping along, and yet the chancellor held back.
So what does this all mean for the economy? Thanks to government spending, recession is likely to have been avoided during Q2 and Q3.
But the PMIs are sufficiently dire that the ‘recession — are we or aren’t we? — discussion is likely to continue into next year, when the debate may reach the US, too.
What does this mean for the markets? Government stimulus, at a time when the UK balance of payments are in any case very weak, is likely to push down on the pound for a good while yet.
As for the FTSE 100, since it offers high exposure to overseas markets, it may not suffer too much and a falling pound may help. But if the economy is weak, this will be reflected in stock market performance, eventually.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees