Bill Jamieson: Recession likely even before Brexit

Consumer spending is too low to offer much relief. Photograph: Getty Images/iStockphoto
Consumer spending is too low to offer much relief. Photograph: Getty Images/iStockphoto
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So now it’s official – the UK economy fell by 0.2 per cent in the second quarter – its worst performance since 2012.

This is the first estimate from the Office for National Statistics and an upward revision is always possible. But with survey data from the end of June pointing to a further slowdown, and apprehension over a no-deal departure from the EU growing by the week, it looks more likely that the third quarter will see a further contraction, putting the UK economy into official recession – two successive quarters of falling output.

The UK figures are also set to question whether the rate of Scotland’s growth in Gross Domestic Product can continue at the rate of 0.6 per cent scored in the first quarter. This was marginally ahead of the UK rate of 0.5 per cent, though the Scottish rate lags that of the UK on a year-on-year comparison (1.5 per cent growth since the first quarter of 2018, while for the UK as a whole the figure was 1.8 per cent).

Two responses are now set to dominate economic policy in the weeks ahead. The first is the increased probability of a cut in interest rates from their current 0.75 per cent level by the Bank of England in September or October. But here the timing is sensitive as it may be seen to influence the outcome of a widely expected general election.

The second is a further strengthening of calls for a high-spend autumn budget to give the economy a boost. With borrowing costs at historically low levels and business confidence so brittle, calls for a big step-up in infrastructure spending will grow ever louder.

So what has pushed the economy into negative territory? It is not all the fault of Brexit. According to the latest assessment from Oxford Economics, while it still thinks a global recession is not inevitable, “we now expect 2019 to be the weakest year for global GDP growth since the global financial crisis.

“However, unlike the aftermath of the 2015/2016 global slowdown – the previous trough for global growth – we expect to see only a grinding recovery in growth in 2020, which is likely to limit any upside for risky assets.”

The slow recovery in 2020 and beyond is not just down to lingering trade tensions. Help from monetary policy is likely to be disappointing – its effects are likely to be limited and insufficient to cause a meaningful growth acceleration.

“Developments over the past month have provided further grounds for unease over the nearer-term global economic outlook. In particular, the timely surveys of activity and trade continue to paint a very pessimistic picture.

“The global manufacturing PMI remained below the 50 ‘no-change’ level for a third month running in July, suggesting that global production growth will weaken further in Q3… Trade indicators suggest that global trade growth is likely to continue to disappoint. Survey-based measures of firms’ export orders are still falling sharply and suggest that annual trade growth will remain around the zero mark.”

And then there are the all-too-familiar problems nearer home. Rob Kent-Smith, head of GDP estimates at the ONS, says that UK manufacturing output fell back after a strong start to the year, when production was brought forward ahead of the UK’s original departure date from the EU.

At the same time, the service sector, which could normally be counted on to provide growth, delivered virtually no upturn at all.

Economists had not been forecasting an economic contraction in the second quarter but had expected it to stagnate, with the consensus forecast for zero growth rather than actual contraction.

The underlying trend here at present is difficult to discern given the volatile movements in inventory build-up and company stockpiling with each twist and turn in the Brexit saga. The first quarter saw a 0.5 per cent growth in GDP as companies stockpiled ahead of the original planned exit date from the EU on 29 March.

Since then stock levels have been partially run down – but this may be reversed in the coming period as firms replenish stocks to seek protection from supply chain disruption on 31 October.

But the omens do not look good. The latest Purchasing Managers survey for the construction sector in July showed activity still contracting in July. Indeed, the reading of 45.3 was the second lowest (after June) since April 2009. Declines continued across the housebuilding, commercial activity and civil engineering sectors.

New orders fell sharply for a fourth month in a row and confidence in the sector deteriorated in July to be at the weakest level since November 2012.

Economic, political and Brexit uncertainties are resulting in a cautious approach by some businesses, leading to some projects being delayed. Brexit-related uncertainties were reported to be particularly affecting the commercial sector. Civil engineering activity was reportedly hampered by delays in awarding infrastructure projects.

The uncertainty over the impact of a no-deal departure from the EU is worrying for construction companies and may result in a more cautious approach when committing to major construction projects.

And there seems little by way of relief from consumer spending. Average retail sales over the year to July rose by 0.5 per cent – a record low according to the British Retail Consortium and KPMG. They said the “challenging retail environment” was taking its toll on the high street and online.

Helen Dickinson, the BRC’s chief executive says a “combination of slow real wage growth and Brexit uncertainty has left consumer spending languishing”.

According to the ONS, wage growth accelerated to 3.6 per cent in the year to May. However, when adjusted for inflation, pay remains below the average recorded before the 2008 financial crisis. Average pay in May this year was £468 a week when adjusted for inflation compared with the pre-recession peak of £473 a week in April 2008.

So, even before we enter the final maelstrom of a no-deal Brexit, the UK economy is struggling. The nerves of businesses and households alike are now set to be sorely tested all the more if, as many pointers indicate, we tumble into recession – even before the much-feared Brexit departure day.