Are the UK and Germany both in recession? The latest data gives a big clue.
Q3 update on whether UK and Germany are in recession
The German economy is in trouble, quite possibly in recession. For some reason, there has been very little press about the UK economy, even though it might very well be in recession too.
Today, new data will provide a big clue. And I thought it would be a bit of fun to tell the story in real time. As I write, I don’t know what this new data will say, I thought we could find out together.
So, while I await this data, here is what we know so far.
In the UK, a recession is defined as two successive quarters of negative growth — the definition is different in the US.
In the second quarter, the German economy contracted by 0.1%, the UK economy by 0.2%. In other words, the UK economy saw a worse performance than the German economy in that period. Now, that’s not something you hear much about.
As for the third quarter, the only real guide we have are the purchasing managers indexes — or PMIs. For these indexes, the key number is 50, anything less points to contraction.
In July, the PMI for UK manufacturing fell to 48, a 76-month low, the construction PMI dropped to 43.1, while the PMI tracking services, the Business Activity Index, stood at 51.4. According to IHS Markit/CIPS which produce the indexes, they suggest very modest/zero growth in July. Providing these figures don’t get worse, the UK will avoid recession by the hair’s breadth.
As for Germany, in July, the PMI for manufacturing was at 43.4, and the services PMI stood at 54.5. The indexes don’t point to contraction, but as was the case with the UK it is a close call.
But July is just one third of Q3. All hinges on what happened in August and what will happen in September.
For Germany, The PMI for August manufacturing, out a few days ago, stood at 43.5. I would suggest that to be on course for avoiding recession, the PMI for services would have to greater than 54.
The UK PMI for manufacturing in August dropped again, this time to 47.4 and the construction PMI fell again to 45.0. So I am thinking the Services PMI will have to be close to 51 or we are in contraction territory.
Well, the German PMI for services is in, what does it say? the data records a headline reading of... cue drum roll, it says...54.8.
That seems like good news to me, it seems Germany is on course for avoiding a technical recession. However, it was not all good, the index pointed to a slowdown in new orders. Together the PMIs suggest that the German economy is expanding, but that growth is very low.
Now for the UK PMI for services, let’s see, while I read the press release that has just arrived.
Let’s see...oh dear, it’s bad news. The IHS Markit/CIPS UK Services PMI Business Activity Index registered 50.6 in August, quite a big drop on the reading for July, published last month.
Chris Williamson, Chief Business Economist at IHS Markit, said: “The PMI surveys are so far indicating a 0.1% contraction of GDP in the third quarter.”
He continued: “While the current downturn remains only mild overall, the summer’s malaise could intensify as we move into autumn. Companies have grown increasingly gloomy about the outlook due to the political situation and uncertainty surrounding Brexit, adding to downside risks in coming months. With the exception of the slump in sentiment after the 2016 referendum, August saw service sector firms at their gloomiest since the height of the global financial crisis in early 2009.”
So, what do I conclude?
The PMIs, which are not wholly accurate in predicting growth in GDP, but are a pretty good guide, suggests that so far in Q3 Germany is just about expanding and the UK is seeing a small contraction.
Assuming the PMIs are accurate, September will have to see an improvement in order for the UK to avoid recession.
You might say, so what? And from an investors point of view, whether the economy grows at 0.1% or contracts by 0.1% makes little difference.
But consider the political ramifications. The ONS is due to release its first estimate of growth in UK GDP for Q3 on November 11th.
If there is an election in mid October, the vote will occur before the first official estimate of UK and German GDP is announced.
Imagine the reaction, however, if data reveals the UK to be in recession, but not Germany, on the eve of a General Election. Imagine the reaction to an election if it is held after November 11. This is a dynamic that I would imagine policy makers in the UK’s leading parties are well aware of.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees