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?


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.


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….



What does a Greek bond yield below 3% tell us?

Sometimes it is good to look at things from another direction so let me start by looking at the current situation through the prism of financial markets rather than the real economy. From @tracyalloway.

Greek government bond yields below 3%

I will return to the why and therefore of this in a moment but let me first move onto the stock market. Here is an article from Forbes from Saturday.

Greece’s stock market rose sharply this week, following a big defeat of the ruling leftist coalition in Regional and Euroelections last Sunday.

The Global Shares X FTSE shares (GREK) have gained 9.10%, as most financial markets around the world lost ground. Banks were particularly strong, leading the rally.

As you can see that was different to many other equity markets and continues stronger performance this year. If we move to the ASE General Index it at 828 is just under its high for the year and is up nearly 9% this year and around 35% on a year ago.

Some Perspective

If we return to the bond market then there are two clear perspectives. The first is that we have yet another day of singing along with the Black-Eyed Peas.

Boom boom boom
That boom boom boom
That boom boom boom
Boom boom boom

We have seen yet another all-time high for the benchmark German bond or bund as the ten-year yield has fallen to -0.21%. That has something of an ominous portent for the world economy if traders are correct. As we note that this time around Greece has joined the party there are nuances.

EFSF financial assistance, part of the second programme, ran from March 2012 through June 2015. In this programme, the EFSF disbursed a total of €141.8 billion, of which €130.9 is outstanding………….Together, the EFSF and ESM disbursed €204 billion to Greece, and now hold more than half of its public debt. ( European Stability Mechanism)

So as you can see there are a lot fewer Greek bonds in circulation than there were, as they have been subsumed into EFSF/ESM system. This has had a consequence for volumes in the market as @Birdyworld points out.

When people are talking about Greek government bond yields it’s worth remembering that it’s basically not a market any more. The average month from 2001-2010 saw 42bn euros in secondary market transactions. The ENTIRE transaction volume 2011-2019 is 29bn euros.

This is a point I remember making back in the early days of the crisis when the ECB was buying Greek bonds to support the market that volumes went off the edge of a cliff. So the bond market does not tell us what it used to.

Also the stock market has improved but when we note it was previously above 5000 we can see that some context is required there too.


We can continue with something of a positive gloss as we note this from earlier this morning.

The Greek manufacturing sector strengthened further in
May. Production and new order growth remained sharp,
with employment continuing to rise. Domestic and foreign
demand were still resilient as new export orders rose strongly………… Currently, IHS Markit forecasts a 3%
increase in industrial production in 2019, with the rate of
unemployment set to fall to 18.3% by the end of the year.

That was from the Manufacturing PMI release which contrary what you might think was in fact lower at 54.2 as opposed to the previous 56.6. But according to this measure there has been a sustained improvement.

The latest headline PMI figure extended the current sequence of expansion to two years.

However some care is needed because if we look at the official data the numbers have improved so far in 2019 but if we look back the two years to March 2017 we see that output is in fact a little lower than the 104.92 of back then. The current reading of 104.03 is also a fair bit lower than the around 110 of last July.

Trade Problems

This is a crucial area because this was the modus operandi of the IMF (International Monetary Fund). The problem is highlighted by these figures from the Bank of Greece.

In March 2019, the current account deficit came to €1.5 billion, up by €352 million year-on-year, as a result of an increase in the deficit of the balance of goods, and notwithstanding the improved services balance. Additionally, the primary and secondary income accounts deteriorated………..In the first quarter of 2019, the current account deficit came to €3.7 billion, up by €420 million year-on-year, as the improved services balance and primary income account only partly offset a deterioration of the balance of goods and the secondary income account.

When we consider the extent of the economic depression that Greece has been through this is a pretty shocking result. All that pain to still be in deficit. Even worse any sort of stabilisation and maybe improvement seems to come with more imports of goods.

 Imports of goods grew by 6.0% at current prices and 4.1% at constant prices. ( first quarter 2019).

The Greek shipping industry seems to be booming against the world trend but was unable to offset the higher imports.

Sea transport receipts rose by 18.9%.

Money Supply

The good news is that narrow money growth or M1 has been picking up in 2019. However at 6.3% in April it remains below that of the wider Euro area so that is not entirely heartening. The numbers were especially weak around the turn of the year so we cross our fingers for tomorrow’s economic growth release for the first quarter.

Also we need to be cautious as Greece does not have its own money supply so these are numbers which make more assumptions than usual. Central bankers will find something to cheer in this however.

According to data collected from credit institutions,(1) nominal apartment prices are estimated to have increased on average by 2.5% year-on-year in the fourth quarter of 2018, whilst in 2018 the average annual increase in apartment prices was 1.5%, compared with an average decrease of 1.0% in 2017.

If you want to see a bear market though this has provided it with the overall index being at 60.5 at the end of 2018 where 2007 =100.


There have been some changes in the Greek situation but some things look awfully familiar. From Kathimerini.

There will be no service on the Athens metro and tram from 9 p.m. on Monday as workers walk off the job to protest understaffing, cutbacks and the privatization of public transport.

Also considering its share price you might think Deutsche Bank would have better things to do than troll Greece.

Greece should not sacrifice the credibility and discipline it has earned with such sacrifice in the past few years to short-term measures, warns Ashok Aram, Deutsche Bank’s regional CEO for Europe.

The Greek economy was sacrificed on the altar of turning the public finances into a sustained surplus. It is hard to believe that it was supposed to return Greece to economic growth ( 2.1% was forecast for 2012) whereas the contraction approached 10% at times. Sometimes I have to pinch myself when I see the media proclaiming the views of those responsible for this as being of any use, but that is the world we live in. But the reality is that after a depression which contracted the economy by around a quarter we still have to look hard for clear signs of a recovery or if you prefer the shape of it is an L rather than a V.

The world can be so upside down at times that we cannot rule out we might see a Greek bond with a negative yield.

Weekly Podcast

I look at why bond yields have dropped so sharply in the past few weeks.


Why has world trade declined in 2015 so far?

The last few days have seen various shock waves pass through word financial markets. We have seen equity markets fall and currencies gyrate at a speed not seen for a while as we reach a stage where fear is more powerful than greed. However if we look below the surface there is a factor which has developed in 2015 which is troubling. Let me open this section with the thought that one of the accepted axioms had become that world trade expanded at a faster rate that world economic growth. Why? Well it can be summed up in one word which is globalisation. This is supposed to bring all sorts of benefits such as lower costs and increased efficiency as well as more choice.

World Trade Monitor

This undertakes monthly surveys of the state of play and the latest one is reviewed by the Financial Times thus.

The volume of global trade fell 0.5 per cent in the three months to June compared with the first quarter, the Netherlands Bureau for Economic Policy Analysis, keepers of the World Trade Monitor, said on Tuesday.

Okay so if trade growth exceeds output growth then we have a problem so let us look deeper.

Economists there also revised down their result for the first quarter to a 1.5 per cent contraction, making the first half of 2015 the worst recorded since the 2009 collapse in global trade that followed the crisis.

So we are going from bad to worse or as Madonna might say “Deeper and Deeper”. The Financial Times points out that this does have implications for world economic output.

In the three months to June, global trade grew just 1.1 per cent from the same quarter of 2014, according to the new Dutch figures. The International Monetary Fund expects the global economy to grow 3.5 per cent this year.

So the falls in 2015 have dragged the growth rate down but official bodies continue on with a rose-tinted view.

“We have had a miserable first six months of 2015,” said Robert Koopman, chief economist of the World Trade Organisation, which has forecast 3.3 per cent growth in the volume of global trade this year but is likely to revise that estimate down in coming weeks.

Have we seen that sort of thing elsewhere at all as official bodies sing along to “Reality was once a friend of mine?”

If we look at the data we see that world trade peaked at 139.5 last December and that compares to 2005=100 but it fell to 136.8 in June. In fact June was a relatively strong month but the overall trend was down as we wonder what happened in July and so far in August. The areas driving this are Emerging Asia (-5%) which is in tune with the theme of these times and Central and Eastern Europe (-13%) which is much more of a surprise as it was down by 4% up to the end of May.

In case you are wondering why the Dutch are recording this then think of the amount of trade which flows through Rotterdam. I wrote a piece when I was on Mindful Money on the subject of the “Rotterdam Effect” where there is in my opinion some double-counting which flatters their economy.

Also I think that the FT is going a little far with the emphasis on 3-D printing.

The slowdown in global trade has led some to proclaim that globalisation has peaked with technological innovations such as 3D printing creating more disruptions.

What about shipping?

This is another way of looking at trade trends as we get a clue from the cost of shipping or the demand for transportation. Earlier this month there were diverging views on the subject. From the Australian Daily Reckoning.

Tanking Baltic Dry Index Foreshadows a Global Recession

But only a day later there was this from The Economic Times of India.

The Baltic Exchange’s main sea freight index, which tracks rates for ships carrying dry bulk commodities, rose to a new 2015 high on Monday thanks to strong demand for capesize vessels

Ah so it was simultaneously rising and not only falling but tanking?! If we look at it now then we see that it is at 942 which is some 11% lower than this time last year and has seen quite a fall since the 1222 of the 5th of this month. In current circumstances the latter move is no surprise but it remains a fair bit higher than the drop towards 500 it saw in February as the impact of falling oil and commodity prices hit it with full force. So there was quite a rally which has now reversed.


Another measure is the Harpex Index from Harper Peterson which is another amalgamation of freight shipping rates. It too rose in 2015 and reached a peak of 646 in mid-June but since then the situation has deteriorated and the reading on the 22nd of this month was 550 for a fall of 15% from that peak.

For perspective the Harpex is up on a year ago (411) but a long way short of the peak of wait for it 1649 which preceded the credit crunch.

Latest News

We do get occasional up to date snapshots and there is this from Platts yesterday.

Freight rates for Panamaxes loading in the UK Continent are currently at the lowest level since late 2013 due to weak regional demand for the vessels in the Baltic and UKC, as well as an unsupportive Panamax environment in the Caribbean.

Although shippers are at least able to load up with fuel that is cheaper than it has been for quite some time.

Ex-wharf Singapore 380 CST bunker fuel plunged to its lowest level in more than 10 years, tracking plunging crude and fuel oil Monday.

The grade was assessed at $208/mt Monday, down $19/mt from Friday. It was last assessed any lower at $207.50/mt on March 2, 2005, data showed.


The new data suggests that world trade growth went into reverse in the first half of 2015. If we look at what shipping rates have done since then we see that both bulk dry (BDI) and container (Harpex) rates have fallen sharply in August. Thus we have a hint that the decline in world trade may have not only continued but grown. It does not prove that world economic output has also dropped but in terms of the Starship Enterprise it does put us on Yellow Alert and it also provides a theoretical backdrop to some extent to what has unsettled financial markets so much.

It is not only physical trade which has issues as we have the ongoing issue of banking deleverage or shrinking and I am reminded of a speech on this subject given by Kristin Forbes of the Bank of England last November.

International capital flows are sharply lower than before the crisis, and international financial exposures are somewhat lower. Home bias is greater. This recent financial deglobalization is driven by a massive contraction in international banking flows – in which the UK plays a critical role. Not only have UK resident banks withdrawn more cross-border lending than any other banking system, but other countries’ banks have reduced their cross-border lending exposure to the UK on a scale that is large even when measured relative to the scope of the UK economy.

Has that finally impacted on financial markets?

Forward Guidance

It would appear that Mark Carney’s promises and hints of an interest-rate rise have had an impact. From the UK BBA.

“These figures show that thousands of us managed to tear ourselves away from the Ashes series to remortgage during July.

“This was a 29% surge on 12 months before and the highest figure we’ve seen for four years. Savvy homeowners are snapping up competitive deals before an expected increase in interest rates.

How is that going Mark?