Is the UK in recession or not?

Today sees or if you read this later has seen the announcement of a new UK Prime Minister. Most likely Boris Johnson but possibly Jeremy Hunt faced some unwelcome news from the National Institute for Economic and Social Research or NIESR yesterday.

Economic growth has stalled and there is around a one-in-four chance that the economy is already in a technical recession.

The opening part of the statement is true as the 0.5% GDP growth in the first quarter will not be repeated and the Bank of England has reduced its forecast from 0.2% to 0%. What they did not say is that as we look at our peers this is a pretty common phenomenon. For example both Germany and Italy fear a contraction in the quarter just gone as this from the latest Bank of Italy economic review points out.

In the second quarter, economic activity in Italy may have remained unchanged or decreased slightly; it was affected by the weak industrial cycle, common to Germany too, caused by persisting trade tensions.

Actually more disturbingly the Bank of Italy thinks things may then get even worse.

The Bank of Italy’s surveys show that firms expect a slowdown in demand over the next few months and indicate a very modest growth in planned investment for the current year.

France seems to have a little growth but not much so the general picture is weak.

Then we get to the phrase “technical recession” . Sadly they do not define this as some describe this as the formal version which is two quarters of economic contraction. If they mean a monthly fall because of course we have monthly GDP data then they are in a bit of a mess because we got this in December.

 However, monthly growth contracted by 0.4% in December 2018 ( UK ONS )

Then it grew by 0.5% in January so quite what that tells us I am not sure about from the monthly date being very volatile.

What is the current position?

Here the monthly GDP review from the NIESR.

The UK economy is on course to contract by 0.1% in the second quarter of 2019. Two quarters of contraction would mean that the economy is in a technical recession, but the initial outlook for the third quarter of 2019 is for growth of 0.2% . If correct, that would still imply that the economy has lost significant moment since the first quarter.

Okay so we learn that recession would have done. I guess they thought it would attract the media more if they used technical recession. Anyway they do not think we will have a formal recession and as it happened the Office for National Statistics suggested we seem to have moved away from a quarterly contraction. Here are its new faster indicators of economic activity. These are not national statistics but then one of its best measures ( RPI) is not either.

The all-industry quarter-on-quarter turnover diffusion index was 0.02 in Quarter 2 2019, slightly above its 2008 to 2018 average; the level of 0.02 means there were very slightly more firms reporting an increase in turnover between Quarter 1 (Jan to Mar) 2019 and Quarter 2 2019 than the number of firms reporting a decrease in turnover between the two periods……..The quarter-on-quarter turnover diffusion index for the services industry was 0.03 in Quarter 2 2019, substantially above its historical average.

Care is needed as for example to get a real number from turnover you need an inflation measure or deflator. But the services number seem hopeful as it is by far the main player in the UK economy.

The Value Added Tax (VAT) indicators show a mostly positive picture for Quarter 2 (Apr to June) 2019.

Moving on the road traffic data for lorries was slightly weaker in May which may well be welcomed in a general sense but less so for the economy. Shipping traffic however went the other way.

The number of ships visiting important UK ports increased in May 2019 to its highest level since comparable data became available in October 2018. The number of ships was 9% higher in May 2019 than April 2019, although these data are non-seasonally adjusted.

Of course in July we have become rather obsessed with the number of UK ships in Iranian ports! Actually the link between that ship and the UK seems a bit tenuous but there you have it. Also I wonder what an unimportant port is?

Brexit

I agree with the “very murky” bit.

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.

For a start we may not leave in the same manner that we did not leave at the end of March. Also the NIESR has reined back its rhetoric in this area.

On the assumption that a no-deal Brexit is avoided, the economy is forecast to grow at around 1 per cent in 2019 and 2020 as uncertainty continues to hold back investment and productivity growth remains weak.

This continues here.

In our main-case forecast scenario, economic conditions are set to continue roughly as they are, with high levels of employment and capacity utilisation but slow growth as businesses refrain from investment in view of continuing high uncertainty about future trading relations. CPI inflation would continue to be close to target.

That is a change from back in the day when we were told this.

In the longer run, our analysis suggests that it would lower GDP by between 1.5 per cent and 7.8 per cent in 2030, also compared with a world in which the UK voted to remain.

Of course we might be lower than otherwise in 2030 but in most scenarios we would have very little idea how true it was. They think a no-deal scenario would hammer 2020.

 In an alternative orderly no-deal scenario, we would expect GDP growth to fall to zero in 2020 and CPI inflation to rise above 4 per cent in response to a lower exchange rate and accommodative monetary policy.

This next bit I found interesting because we keep being told we need more fiscal policy, whereas in this report it does not have much impact.

Fiscal policy measures may be required to help smooth the adjustment to a no-deal Brexit though, as shown in Box C, they would be unlikely to have a large macroeconomic effect.

Comment

So we see that for all the column inches devoted to it there was in fact much less to the NIESR report than you might think. One of the signals I report on regularly has been flashing a warning for some time. This is the issue of UK Gilt (bond) yields. Both the two-year and five-year yields are below 0.5% suggesting yet another interest-rate cut is on the cards. So the general consensus is for weak growth at best. Also that view seems to be spreading as this from a Markit survey suggested yesterday.

There were some noteworthy developments in
interest rate expectations in July, as the proportion
of UK households predicting the next move by the
Bank of England to be a cut rose to its highest in
over two-and-a-half years.

Tucked away in the report was a hopeful signal which correlates with the recent strong retail sales growth.

UK households continued to signal decent growth
of incomes from employment, which corroborates
what recent ONS data have shown and is a positive
indication for consumer spending this summer.

If we remind ourselves of my view that the UK economy has been growing at around 0.3% per quarter for a while then after 0.5% in the first quarter we would literally expect ~0.1% in the second. With the inaccuracies in the data and the problems around the world signalled by the trade data in the Pacific we looked at yesterday we could see a negative quarterly number for growth. However we would be very unlikely to be alone….

 

 

14 thoughts on “Is the UK in recession or not?

  1. Hello Shaun,

    Well I suspect we are entering a period of stagflation unless the newly appointed conservative leader make a pig’s ear of it all 😉

    Forbin

  2. Not if you are in the building sector, it has been on a seemingly endless boom for as long as I can remember(certainly the mid 90s), and every response by the government and the Bank of England to the economic problems and BREXIT seems to be positive for the sector.

    • Kevin,

      The building sector is booming but not in construction which is a different sector completely. In fact its difficult to get good tradesmen these days, part of this was due to the massive building following the war and in the 60s and 70s there was a high percentage of workers going into the building trade and plenty of apprentice schemes. What has happened is most gone into the building sector (baby boomers) now retired or retiring and that is part the reason for the lack of good tradesmen.

      This is probably part the reason why Persimmon had so many problems with the faults in their houses very few good skilled workers are in the industry. The ones that remain are in demand and building selectively and not the bog standard houses if you know what I mean.

      • dunno seems houses are even worse than the crap I brought in the mid 90’s …and that ain’t saying much !

        Forbin

        • forbin,

          Buildings started to deteriorate in the 80 and 90s in part due timber framed houses the only main brick structure were the outer skin brick walls and a lot of plumbing now inside plastic.

          I

  3. Strangely enough the IMF today has downgraded world growth and upgraded UK growth this year which is contrary to most other indicators lately:

    https://www.bbc.co.uk/news/business-49074923

    CBI industrial trends came in at -34 much worse than forecast:
    https://www.theguardian.com/business/2019/jul/23/uk-factories-facing-biggest-slowdown-since-financial-crisis-says-cbi

    When I read the industrial trends figures earlier I had to read the IMF forecast a number of times on first thought maybe the heat of today got to me.

    With Borris now leader of the conservative party he is going for a hard BREXIT and possibly a election will be called and all this uncertainty will do nothing for business sentiment. I find it hard to believe the UK will meet the IMF forecasts.

    In other news which is a sign of a slowdown is house sales slumped in June a whacking 17% from a year earlier in the UK
    https://www.cityam.com/house-sales-plummet-in-june-held-back-by-brexit-ball-and-chain/

    So where does the IMF get their 1.4% figures from?

    • ehehhe

      “…Therefore any dip in transactions should be viewed as a momentary stutter and with many other market indicators suggesting a return to form and growing levels of buyer demand over the last few months…”

      not round here , the market is dead quiet …… like a morgue

      wishful thinking I think on their behalf

      Forbin

  4. I am glad you relate the performance of the UK relative to our peers as this seldom is reported in the MSM and it always sounds as if the UK is doing worse than everyone else. We live in a very connected world and need to always see our performance as part of the bigger picture.

    It will be interesting to see if figures are revised up in future which inevitably they are.

  5. ‘Brexit’ seems to be having 2 main effects – mid class Remain voting management types frozen in the headlights rein back on investment; ordinary Joe worker types getting a pay rise and spending with confidence much to the chagrin of the chattering classes. If the former could shake off their fears, the economy would surge. What’s the Depression era saying….. “the only thing we have to fear is fear itself”.

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