The UK looks to have avoided a recession, for now

New GDP figures show the UK economy contracted in August by 0.1% compared to July. However, upward revisions to June and July growth rates now mean that there is an extremely low likelihood that the UK has fallen into a recession.

Real GDP growth contracted by 0.2% in the second quarter of this year, and so another negative quarter would have triggered a technical recession. The rolling three-months on three-months growth rate is estimated to have risen to 0.3% in August from 0.1% in July, and so even if there is a very large fall in GDP in September – the final month of the third quarter – the quarterly growth figure will be positive.

Politically, avoiding a recession will come as a relief to the government, which has created tremendous volatility in economic data as Brexit was delayed from the initial deadline of the end of March. Households, companies and the government had been stockpiling goods and supplies, only for the delay to lead to huge destocking, and continued weakness in business investment.

Though the UK appears to have dodged a recession, the outlook remains grim. The contraction in GDP in August coincides with the government ramping up threats to leave the EU without a deal or transition period. With political uncertainty likely to remain high as the current 31 October Brexit deadline draws closer, leading indicators such as the purchasing managers indices (PMIs) have been deteriorating. The September PMIs surveys suggest that all three of the major sectors (services, manufacturing and construction) contracted in September.

With regards to monetary policy, the Bank of England has been resolute that interest rates need to rise if a smooth Brexit can be achieved. However, one of the more hawkish members of the policy committee has recently signalled that interest rates may need to be lowered, even with a smooth Brexit being achieved.

Michael Saunders pointed to concerns over the weakness in international trade, caused by the US-China trade war, and a scenario where Brexit uncertainty continues even after a deal is secured. A UK recession could have pushed the committee to cut interest rates, but these figures have reduced the likelihood of a cut in the near-future.