Has Recession Started Creeping Into The UK Economy?

  • Jul 09, 2019 BST
  • Team Kalkine
Has Recession Started Creeping Into The UK Economy?

A recession occurs when an economy contracts substantially for consecutive six-quarters. In case of recession, there would be a fall in following leading economic measures, i.e. contraction in real GDP, falling income and jobs, contraction in manufacturing activities and declining retail sales.

Manufacturing jobs loss is one of the crucial indications of an imminent recession. Generally, manufacturers receive big orders months in advance, if that starts lowering over the period, so the factory employment and if factories stop hiring, it indicates other economic activities will slow.

An alarming indication of recession can also be triggered if there are several quarters of falling growth but remain positive growth or one-quarter of negative growth and followed by several quarters of positive and then again one-quarter of negative growth.

A falling demand leads to a drop-in sale, and manufacturers start restricting expansion. That leads to a weaker job market and by the time, the recession is there. Typically, recession lasts for 9 to 18 months, but the damage done because of the recession could be long-lasting. It is destructive and leads to high unemployment kind of scenario; as a result, consumer sentiment jolts that lead to a plunging in consumer spending and leading many businesses to go bankrupt.

However, the stock market is not an indicator of recession, as present stock prices reflect discounted future earnings or cash flows of the business. Therefore, market expectations are sometimes too bullish, and sometimes it can be too bearish, that leads to massive volatility in the stock market and prices against the economic cycle. When a recession hits, the equities market turns bearish, and market witnesses steep sell-off, which can lead to deepening the intensity of recession as institutional investors and HNIs lose confidence in the economy.

The UK scenario

Manufacturing PMI

The recent manufacturing data announced by IHS Markit on UK Manufacturing PMI once again showed contraction in the manufacturing activities. In June 2019, there was a sharp decline in Manufacturing PMI to 48.0 from 49.4 recorded in the previous month. Also, it was substantially below the consensus estimate of 49.2. The latest recorded data reflects an intense contraction in the manufacturing activities since February 2013.

Source: Trading Economics

The continuous contraction in the manufacturing sector was dragging the UK job market as well as employment declined for the third straight month. This one is crucial measure that indicates, the recession has started creeping into the UK economy, and if the trend goes the same from here, it will reduce consumer spending substantially in the months to come.

IHS Markit manufacturing PMI, through survey of 600 industrial companies, track performance of the manufacturing industries every month. Various variables, like new orders, output, employment, supplier's delivery time and stock of items bought are tracked by the index. A reading above 50, generally indicates expansion in the manufacturing activities, and a reading below 50 reflects a contraction in the manufacturing activities and a reading at 50 reflects no changes.

Service PMI

The IHS Markit UK Service PMI also recorded lacklustre performance, as Service PMI for June 2019 declined to 50.2 against 51.0 reported for May. However, the services sector remained in growth territory as it was 0.2 bps higher than the threshold limit of 50, but growth has weakened as compared to May 2019.

Source: Trading Economics

The recent data reflects a softer expansion in the past three months, this was primarily driven by heightened uncertainties around Brexit, and new orders declined for the five times in the previous six months, and work backlog slumped for the longest time since 2011. However, the service sector recorded employment growth for three times in the past four months, as companies are hiring for long-term business expansion plans.

Also, the input prices shot up, mainly because of the increase in transportation costs and wage pressure. However, output prices increased at a second lowest rate since June 2017 on account of intense competition in new works.

However, overall confidence fell mainly because of heightened political uncertainties in the UK and concerns over subdued global economic growth. Theses thing would continue to hold back corporate earnings in the coming period as well.

The Purchasing Manager’s Index (PMI) of UK is released by IHS Markit every month, based on the data collected from service sector business like financial intermediation, business services, transport, IT services, hotels and restaurants and communication sector. Service PMI index tracks factors like sale, employment, inventories and prices A reading above 50 indicates the sector is expanding and below 50 reflects contraction.

Consumer Confidence Index of UK

The UK’s consumer confidence index fell to -13 in In June 2019, against -10 recorded in the month-ago period and drifted below the market expectation of -11. This was mainly driven by heightened global growth concerns amid ongoing trade quarrel between the US and China and increased domestic political uncertainties.

Source: Trading Economics

The Consumer Confidence measured by Gfk, is one of the leading indicators that measure the level of optimism that the consumer has about the performance of an economy in the past 12 months and following 12 months. It is collected through surveying of approximately 2,000 customers, and they are asked to rate past and future economic conditions regarding the personal finance situation, climate for significant purchases, overall economic situation and level of saving in the economy.

Brexit Risks

The heightened chances for a no-deal Brexit have jolted the consumer and investors sentiments. A no-deal Brexit means crash out of the United Kingdom from the EU bloc without any arrangements. As recently the prime contender for the position of UK’s next Prime Minister has announced that he will execute Brexit in his first 100-days if he comes to power. He also added that he would establish a "War Committee" to get Britain out of the EU bloc by October 31, deadline. This could further impact the economic indicators in the months to come. Several economists including BOE chief Mark Carney as mentioned earlier also that a "no-deal" Brexit could be a catastrophe for the UK economy. He also added that it could force the UK's economy into the recession.

As recent economic indicators trends recorded, indicates that the UK's economy has started grappling into a potential recession. An ongoing decline in the manufacturing job market could lead to reduced consumer spending and demands, that will force industries to slash their existing workforce.

A no-deal Brexit risk

In the wake of a no-deal Brexit like situation, it will end all ties between the UK and EU bloc with immediate effect and without any transition period. It will disrupt the supply chain of the industries as free borders, and free moving will come to an end with immediate effect. And, the UK would have no more extended access to the single market of the European Union post a no-deal UK withdrawal from the European Union.

Tumbling Sterling

Since the Brexit referendum has taken place, the pound has fallen significantly against the US dollar. And, an increased chance for a no-deal Brexit could again lead to falling in the sterling value against the major currencies. This is dangerous for the UK economy, as it will hit the import bill of the UK, which can lead to increased fiscal deficit and also the purchasing power of the country will fall against the other currencies. Even, it will dent the top line of the domestic industries substantially.

Daily Price Chart (as on July 08, 2019), before the market close. (Source: Thomson Reuters)

Since the data of referendum took place as on June 23, 2016, the Sterling has fallen more than 18% against the US dollar. At the time of writing (as on July 08, 2019 at 01: 56 PM GMT), GBP/USD currency pair was quoting at 1.2523 and added 0.02% against the previous day closing price. It has registered a 52w high level of 1.3385 and a 52w low of 1.2438 and the current trading level, it was quoting approximately 6.44 per cent below the 52w high level and about 0.7% above the 52w low trading level. Also, at the current trading level, it was quoting considerably below its 200-day simple moving average prices, which indicates that sterling is in long-term bearish phase and could fall further from the current trading level.

Recently, BOE head Mark Carney said that a reduction in the market interest rates was unsurprising as many places substantial weight has been put on the chances of a "no-deal" Brexit. He also added that BOE would support the transition as much as possible. In one of his recent talk, he said that in the wake of no-deal Brexit fiscal policy will be required to protect the economy.

The bottom line is the recent data on the economic indicators followed by tumbling pound indicates weakness in the UK's economy and this could fall further as the next withdrawal deadline of October 31, 2019 come closure.

With Bank of England reducing the interest rates to a historic low level, the spotlight is back on diverse investment opportunities. 

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