Recession Fear Looming Large On The UK Economy

  • Jul 12, 2019 BST
  • Team Kalkine
Recession Fear Looming Large On The UK Economy

GDP needs to grow by at least 0.1% on a month-on-month basis in June 2019, to avoid a contraction in the second quarter. Growth in May 2019 was better than expected and recorded an increase of 0.3% on a month-on-month basis against a contraction of 0.4% recorded in April 2019.

UK economy which last slipped into recession in the third quarter of 2008, is once again on the brink of the recession, though as per the latest data released by the Office for National Statistics (ONS) as on July 10, 2019, the GDP performance in May 2019, was better than expected. The British economy returned into the growth cycle in May 2019, after witnessing a contraction of 0.4% in April 2019. As per ONS, this growth was primarily driven by some improvement recorded in Car production.

However, after reporting a 0.5% growth in the first quarter (Jan-Mar) of 2019, growth started softening for two consecutive rolling quarters (Feb-April and Mar-May) of 2019. The rolling three months from March-May 2019, growth in GDP was recorded at 0.3%, compared to the rolling three months growth of 0.4% recorded in March to May period.

Source: Office for National Statistics (ONS) - GDP monthly estimate

Note: first quarter or Q1 refers to the period from Jan-March, second quarter or Q2 refers to the period from April to June, third quarter or Q3 refers to the period from July to September and fourth quarter or Q4 refers to the period from October to December and rolling three months estimates were calculated by comparing the GDP of three months period with the GDP of past three months period.

Car Production Contributed Substantially in May GDP growth

Source: Trading Economics

UK's Car production in May 2019 jumped to 1,16,035 units from 70,971 units produced in April. But still, the number of units produced in May 2019 was below the average unites produced in the first quarter (Jan-Mar) of 2019.

In the rolling three-month period from March to May 2019, GDP grew by 0.1% in March, then contracted by 0.4% in April and turned back to positive and recorded a growth of 0.03% in May 2019. During the same period, the Index of Services remained flat in March, up by 0.1% in April and again turned flat in May. Index of Production grew by 1.4% in March, contracted by 2.9% in April and pulled back to positive in May and recorded a growth of 1.4%. The manufacturing activities recorded a growth of 1.6% in March, then contracted substantially in April by 4.2% and for May, posted a growth of 1.4%. However, construction activities contracted by 1.5% in March, then again recorded a contraction of 0.5% in April and grew by 0.6% in May. Agriculture activities recorded a contraction of 0.2% in March, then again contracted by 0.1% in April and remained in flat trajectory for May.

Post May GDP data coming at the top of expectation, there has been an increase in chances that the British economy could remain flat against an increased consensus of a contraction in the economy in the second quarter of 2019. However, it’s still not sure that the British economy will grow in the second quarter to June 30, 2019, as recent data on Manufacturing PMI, Service PMI, and Retail sales were mostly poor.

The IHS Markit manufacturing PMI for June 2019 was recorded at 48.0 against 49.4 recorded in May and was considerably below the market expectation of 49.2. As reading reflects a steep contraction in the manufacturing activities and new orders slumped to the lowest in the past seven years. With inventories level at the top on account of increased chances of a disorderly or no-deal Brexit and a slowdown in global economies and heightened competition.  Also, the capacity utilization in the second quarter of 2019 was at 80.70% against 81.3% recorded in the previous quarter.

The UK’s service PMI index reported by IHS Markit for the month of June 2019 narrowed to 50.2 from 51 recorded in the month of May 2019. The recorded reading for the month of June was considerably below the consensus estimates. The recent reading for June reflects a slower expansion in the service activities in the past three months, and it was mainly driven by ongoing Brexit conundrum hovering around the UK and slack domestic economic conditions. Input price inflation was nudged by higher transportation cost and wage pressure. Meanwhile, output prices grew at the second-slowest pace since June 2017. And finally, on account of jolted market condition amid Brexit related uncertainties and increased chances of a global economic slowdown, confidence slumped in June 2019.

The Confederation for British Industry's monthly factory orders balance slumped to -15 in the month of June from -10 reading recorded in the previous month. The reading was lowest since October 2016 and considerably below the consensus forecast of -12 for the same months.

It’s not only the UK that has been suffering from weak economic growth, but the global economy overall is under the slowdown spiral. Weakness continued in the global manufacturing sector at the end of the second quarter, as a composite index from JP Morgan and IHS Markit -the JP Morgan Global Manufacturing PMI in association with ISM and IFPSM – fell to its lowest level for over six-and-a-half years in June and for the first time since second half of 2012 posted back-to-back a contraction reading. More than 50 per cent of the nation among the 30 for which the June PMI reading was released, signalled contraction. While there was a continued weakness in international trade flow, global manufacturing employment too logged a mild decline for the second straight month.

The impact of the no-deal Brexit is not only going to impact the UK, but it can exacerbate, and the impact could result in a broader global economic slowdown.  Mark Carney, Bank of England (BoE) governor who earlier too had raised his concern over the vote for Brexit, has said that global trade war and a no-deal Brexit will have a profound spillover impact on the worldwide economy.  It was a warning from the BoE governor of a new geopolitical tension, starting with this level of protectionism, which could trigger a new Cold War coupled with high economic costs. Carney while taking the historic decision recently of keeping the interest rates on hold at 0.75 per cent, given inflation remaining below the 2 per cent target and uncertainty in UK's future relationship with the European Union, warned that smooth transition of Brexit and strengthening economy would lead to a rate rise. Meanwhile, the UK chancellor Philip Hammond has also expressed his concern and warned that a no-deal Brexit could cost the UK up to £90bn.

Meanwhile, Boris Johnson, a widely famous contender for the UK’s next prime minister position, recently commented that, if he comes to power as prime minister, he will deliver Brexit in his first 100-days. Also, he is planning to form a “War Committee” to get the UK out of the EU bloc by October 31, this year deadline. As per some of the media sources, the War Committee would include a small number of senior minister and Brexiteers advisers.

The ex-mayor commented that “We Tories, which I believe for long have not able to talk up the agenda of free-market economics and we are not able to be positive about this. And, I am also aware of the fact that many people will not agree with everything Donald Trump says and does but now he has results, and we should pay respect to that, he added”.

Reasons behind Brexit

As many mentioned, the EU has imposed too many rules, and regulation on the business and the UK is paying billions of pounds every year as membership fee and gaining little against it. The UK lawmakers also wanted to set their own laws and rules rather than implementing the consensus laws decided by the EU member countries. Another crucial reason why people are supporting is the Immigration problem. Pro-Brexiteers want complete control on its borders, and they want to reduce down the number of people coming in the UK to live or to work as Free Movement is the spirit of the EU nations, which allow citizens of the EU member countries to move freely across the EU, without any visa.

Potential Impacts of a no-deal Brexit

In case of a no-deal Brexit, all ties of the UK with the European Union will end with immediate effect and without any transition period. Also, it does not assure the right of residence to the citizens, which could create several disruptions in the near terms and could impose border checks on their cargos. It would hurt the supply chain of the many companies, and that could disrupt their operations in the short-term and could shoot-up their operating expenses significantly. Post a no-deal Brexit, and the UK would no longer have access to the Single Market of the European Union.

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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