Is the UK in recession or not?

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by Shaun Richards

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….

 

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