Phew, UK economy out of hot water, but something stirs in the US

It seems the UK is going to avoid recession after all, but something curious is happening in the US.

Article updated: 13 September 2019 11:00am Author: Michael Baxter

When last I looked, it seemed like recession was looming in the UK. To remind you, the definition of recession — at least the one used in the UK — is two quarters of negative growth. The second quarter of this year saw a 0.2% contraction, while the latest purchasing managers indexes suggested things were, if anything, getting worse.

But while the purchasing managers indexes are the best early guide to the UK economy that we have, they are not always fully in-line with what the official data says.

And sure enough, when the official data from the Office of National Statistics was released earlier this week, it was a lot better than expected — GDP was up 0.3% in July, month on month. Just to re-iterate, that’s compared to June. If all months saw expansion comparable to that seen in July, the UK economy really would be booming.

Of course, it isn’t. The general feeling is that this substantial jump was a one-off. Capital Economics, for example, suggested that this good ish news “could be the first real signs that businesses are bringing activity forward ahead of the possible 31 October Brexit deadline.”

August should do okay, too, as the annual shutdown in car manufacturing plants was changed to April this year, meaning activity in the car sector will be up on 2018.

On the other hand, all economists, at least the ones I follow, agree that while the UK looks set to avoid recession, growth will be very weak.

For example, Paul Dales, Chief UK Economist at Capital Economics, said: “We estimate that the underlying pace of growth is around +0.2% quarter on quarter. Whether that pace rises or falls over the coming quarters almost entirely depends on what the timing and result of the looming general election means for Brexit.”

We can’t ignore the purchasing managers indexes altogether by the way, they are a pretty good guide to the underlying trend and they suggest that the underlying trend is one that is close to recession.

The news from the labour market was okay, most significantly average wages are now rising at 4 per cent year on year, the fastest rate of increase since 2008. That is good. The trouble is, this rise in wages is not being matched by a rise in productivity. Such is the potential upside risk to inflation, that many observers of the Bank of England’s monetary policy committee have argued that despite Brexit, the next move in UK interest rates might be up.

My own favourite gauge of the UK economy, the residential market survey from the Royal Institution of Chartered Surveyors, is consistent with this wider mood of a weak economy, but not in recession. The last index stood at minus four — after seeing a sharp drop to minus nine the month before. This index has always been a good forward indicator of the UK economy. The index has been in negative territory for a year now. This does not bode well, but the fact that the index has avoided sinking into seriously high negative numbers, unlike previous downturns, suggests disaster is being avoided.

The US surprise

Meanwhile, in the US, core inflation has risen too, and this really is a big deal, it has risen to
an eleven-year high of 2.4 per cent. Month on month, core inflation, and by core, I mean one-offs are stripped out of the equation, has been at 0.3 per cent for three months.

The US President is screaming at the FED to cut interest rates. Both he, and the British Prime Minister, want to get their respective governments to borrow at near negative interest rates, and stimulate the economy/spend on infrastructure.

I have no problem with the sentiment, I do wish governments had done this eight years ago, when interest rates were also close to zero, however.

But I also worry about the timing. In the UK, we have rising wages not matched by rising productivity, in the US we have core inflation at an 11-year high, while the Chinese trade war suggests prices in the US will go up further.

Things are different now. Deep forces were the real reason why interest rates have been so low for the last ten years. Among those deep forces were the massive German and Chinese trade surpluses, which effectively sucked demand for goods and services out of the global economy and increased demand for bonds.

Those two forces may be set to go into reverse.

However, other factors, such as the impact of technology on inequality and rising corporate profits to GDP, may not be set to go into reverse.


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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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