Snapshot - Strategy & economics

The UK looks to have avoided a recession, for now

GDP figures show activity is deteriorating, but not fast enough to force the Bank of England to act

10/10/2019

Azad Zangana

Azad Zangana

Senior European Economist and Strategist

Schroders

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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.

This article is issued by Cazenove Capital which is part of the Schroder Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

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