Are we heading for another recession?
We are being assailed by conflicting headlines about the economic impact of the British public’s shock 23 June vote to leave the European Union. Some seem to suggest a recession is all but inevitable. Others imply we’re in the clear and can relax.
Each new survey and official data release also seems to have a different message on this big question. Yesterday’s retail sales figures for the month after the referendum vote, for instance, were significantly stronger than expected. So what should people think? What is really going on?
What is a recession anyway?
The technical definition is two successive quarters (adding up to six months) of contracting GDP. One quarter of falling output does not count.
The UK was last in a technical recession in 2009, in the wake of the global financial crisis. Our GDP began contracting in the second quarter of 2008 and did not start growing again until the third quarter of the following year.
And are we heading into another one now?
The answer is that it is impossible to say with any certainty, which is why there are so many conflicting headlines.
A majority of financial-sector economists, surveyed by the Bloomberg news wire service early last month, thought the UK would indeed enter recession thanks to Brexit vote.
Other forecasting institutions have been more circumspect. The respected National Institute for Economic and Social Research has said there is only a 50 per cent chance of a recession within the next 18 months.
The Bank of England this month forecast that the UK will avoid a recession, although only just. Under the Bank’s forecast growth is virtually zero in the entire second half of the year.
Isn’t the Bank also supposed to be helping the economy?
Indeed. And the Bank argues that its decision to cut interest rates and restart its money-printing programme is the major reason why (in its forecasts) the economy avoids recession.
Another forecaster, the credit rating agency Moody’s this week forecast that the UK would escape a recession. But it also noted that this was because it had factored in the “assumption” of some fiscal loosening from the Government.
In other words, policy is an important factor – and makes forecasting even more uncertain.
The new Chancellor Philip Hammond may decide to sit on his hands in the Autumn Statement rather than increasing state spending or cutting taxes to boost output. Alternatively, he may unveil a fiscal stimulus. Either way, that will have a direct impact on growth.
These are all just forecasts. What about actual data?
The truth is that we still have very little. There’s always a lag in getting “hard” data on GDP from the Office for National Statistics.
That’s not because its statisticians are lazy – but because it takes time for them collect data from shops, businesses, employers and households to build up a picture of what is happening to the overall economy.
Yesterday we had the dole claimant count figures for July, which showed the number of Jobseeker’s Allowance claimants, unexpectedly, falling.
Yet many economists believe unemployment to be a lagging indicator of economic activity, meaning that we should perhaps be careful of placing too much emphasis on this data.
That’s why there has been such close attention paid to non-official surveys of business activity and consumer confidence since the vote.
These are seen as leading indicators of where the economy is going.
And what do these show?
It’s a mixed picture. One of the most closely watched set of timely surveys are the so-called Purchasing Managers Index studies, which see managers in firms asked about various levels of activity over the previous month.
These indexes have shown the biggest decline in activity since 2009 in the wake of the Brexit vote. Other surveys clearly point to firms cutting back on their investment plans over the coming months.
Some important consumer confidence figures have also painted a bleak picture, with the GfK barometer showing the biggest drop in seven years since the Brexit vote.
However, other surveys of retailers have shown a much less ominous picture, suggesting that Britons kept on shopping in July. That’s backed up by the ONS’s retail figures yesterday.
With retail sales constituting around 20 per cent of GDP, that’s an important factor. But will retail sales hold up if firms hit the brakes on investment, slow their hiring and keep a lid on wages?
We won’t start getting serious amounts of hard data from the Office for National Statistics on the period immediately after the referendum until next month at the earliest.
So we just can’t say anything yet?
That would be an exaggeration. The evidence we have so far is cause for real concern about the immediate prospects for the economy, which is why the Bank of England has cut interest rates for the first time since 2009.
If nothing else, we can see that the value of the pound has collapsed against the dollar. Immediately after the vote it fell to its lowest level since the mid 1980s. It also fell steeply against the euro.
That made Britons instantly worse off in terms of what we can afford to buy from abroad, even if we do not enter recession.
And the fact that such a wide array of economists have downgraded their forecasts since the vote suggests that there is reason to worry.
Even when they are not forecasting a technical recession, almost all analysts expect a sharp slowdown in the rate of growth.
Is there much difference between a recession and a slowdown?
Arguably not. Almost nobody thinks we are on the brink of a 2008-style slump, when GDP fell by more than 6 per cent from peak to trough.
But there is a broad of consensus that growth will decelerate markedly.
And that will mean lower wage growth than otherwise, a probable rise in the unemployment rate and smaller increases in living standards.
As the Institute for Fiscal Studies has noted, it will also mean lower tax receipts than otherwise and more austerity (over the medium term), which will mean cuts in public spending or perhaps tax rises.
Whether or not there is a technical post-Brexit vote recession, none of this adjustment will be pleasant.