Bill Jamieson: Spectre of global recession returns

Ouch! Just when we were told the UK would be likely to skirt a recession this year, fears of just such an outcome wiped £95 billion off the value of the UK’s biggest firms last week.

The FSB's Andrew Macrae says confidence has evaporated over the last quarter
The FSB's Andrew Macrae says confidence has evaporated over the last quarter

The 3.2 per cent wipe-out in just two days was the biggest weekly fall since January 2016, hitting the pension savings of millions.

What has put the “R” word back on everyone’s lips was a two-pronged assault on confidence: a downturn in the dominant UK service sector last month to a six-month low, while in the US the once-resilient service industry reported the sharpest drop in headcount since late 2009.

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With heightened fears over an extension of US trade tariffs and Brexit anxieties at home, the talk is now of a global recession, with the US, Germany and the UK set for two successive quarters of falling output unless there is a swift response from leading central banks and governments. Indeed, some believe that the UK may already have entered recession in the July-September quarter.

IHS Markit economist Chris Williamson said, on the fall in the closely-watched Markit/CPS purchasing managers index for services: “Coming on the heels of a decline in the second quarter, [this] would mean the UK is facing a heightened risk of recession. September’s decline is all the more ominous, being the result of an insidious weakening of demand over the past year rather than a sudden shock.”

Combined with even weaker manufacturing and construction PMIs, September’s all-sector PMI sank to its lowest since the month after the referendum decision to leave the EU in June 2016 – and before that, 2009.

What gave these latest readings added shock value was that they followed ONS data only last month pointing to the economy growing faster than expected in July, easing fears that it could fall into recession.

However, not all are convinced that survey data is an accurate predictor of economic activity. Immediately after the Brexit referendum, the surveys indicated a sharper downturn than was actually the case. They may be more a reflection of changes in business mood than in subsequent output. Earlier this year, for example, the surveys failed to capture the flurry of Brexit preparations and stockpiling ahead of the original 29 March exit deadline – activity that led to a better than expected outturn for the first quarter.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said last week: “The survey’s poor track record recently means its recession signal should not be believed. Markit’s services survey has been far too downbeat over the last year.”

However, miserably low levels of business investment are almost certain to affect longer-term labour hiring, productivity and output. Meanwhile, we will know more on Thursday when official data on UK GDP performance in August is released. But there is little doubt that low business confidence amid the latest political turmoil with the Brexit deadline just three weeks away is affecting activity.

The Federation of Small Business Scotland Index slumped from a reading of plus 3.3 points to minus 13.5 in the third quarter, while the UK figure gained marginally, from minus 8.8 points to a still dismal minus 8.1. It is the first time the overall UK figure has been negative for five successive quarters.

Andrew McRae, FSB’s Scotland policy chair: said: “Scottish business confidence has evaporated over the last quarter. And, for more than a year now, UK business optimism has been outweighed by fear and doubt about the direction of the economy. This trend will only end when policymakers pull themselves together and set out a clear plan for our futures.

“While firms must do what they can to prepare for this outcome, it would be unforgivable if good Scottish businesses go to the wall because of political games.”

According to the research, three quarters (76 per cent) of Scottish businesses say that their costs have increased compared with the same point last year. UK-wide about two thirds (67 per cent) of businesses reported increased overheads.

FSB Scotland is calling for an emergency UK budget to restore confidence and is urging the Scottish Government to take action to reduce costs and overheads for smaller employers following a second quarter 0.3 per cent GDP fall north of the border.

Last month’s UK-wide construction sector PMI survey showed activity contracting at the second fastest rate (after June) since April 2009. Furthermore, the forward-looking indicators of the survey offered little, if any, hopes it is headed for better times any time soon.

The reading pointed to contraction across the house building, commercial activity and civil engineering sectors, with the average across the July-September period showing the weakest quarterly performance since the second quarter of 2009.

Boding ill for the future was that new orders fell at a rate similar to August’s sharpest drop since March 2009 – the sixth successive monthly fall. A further delay to the UK’s exit from the EU past 31 October could prolong uncertainty, further weighing down on construction activity.

Nor was the PMI for the UK manufacturing sector any more encouraging. The reading for September showed activity contracting for a fifth successive month with output, new orders and employment all declining, and confidence low. Indeed, employment fell at the fastest rate since February 2013. Domestic demand was reported to be particularly weak as new orders contracted at the second fastest rate (after August since July 2012). And the investment goods sector was reported to be by far the weakest, indicating that major uncertainties – Brexit, domestic politics and the global economy to the fore – are weighing down particularly on companies’ investment plans.

Arguably most worrying of all are the clear signs of global slowdown. Combined service and manufacturing indices in the US are now, says Capital Economics, at levels “consistent with a recession”. And figures last week showed Germany’s services sector sharply lost momentum in September, fuelling fears that decline in the country’s manufacturing sector was spilling over into the rest of Europe’s largest economy.

So far, UK consumer spending has held up under all these darkening skies. But monetary and fiscal stimulus here and abroad are now taking on an added urgency.