UK growth figures do nothing to assuage fears of recession

A disquieting set of growth figures from the UK this morning which, despite the headline reading showing the economy expanded by 0.2% in August, suggest that the threat of recession continues to stalk the economy closely.

The August increase was largely a rebound from the strike-hit performance recorded in July, where the contraction seen was today increased from -0.5% to -0.6%. Given this poor performance, output in August was always expected to be positive. However, allowing for July's low starting base and it is hard to find any real growth at all. What growth was seen was mainly confined to the services sector, where activity jumped by 0.4% as the August school holidays meant there was no repeat of the teachers strikes seen in July. The number of working days lost to industrial action in the health sector was also lower. These two factors alone accounted for some 2/3rds of the growth seen, which very much suggests a worrying lack of underlying momentum. Add into the equation that manufacturing fell by -0.8% and construction by -0.5% - both exceeding expectations – and it is hard not to conclude that the growth outlook is fragile.

Further darkening the picture is the most current survey evidence, which is suggesting we will see a weather-related underperformance in September’s retail sales figures in addition to a further fall in manufacturing output. The -0.8% reading seen today, combined with July’s -1.2% print, have largely offset the +2.7% number seen in June, and with rising interest rates making the cost of carrying inventories increasingly expensive, it is likely that manufacturing activity has further to fall as stock levels are reduced.

Overall, today's report makes the chances of the UK avoiding negative growth for Q3 as a whole look increasingly unlikely. The most recent forecast from the Bank of England (BoE) had growth of 0.1% over the quarter; to ensure at least a flat quarter September’s number will now need to print at just over 0.2%, which on the back of today’s report and the downbeat picture being painted going forward, looks set to be a little too much for the UK to achieve. A negative Q3 will do nothing to assuage fears over what many see as a likely UK recession, particularly given that most of the dampening impact from the monetary tightening delivered to date has yet to be felt. Certainly it is hard not to conclude that, after slowing over late summer, economic performance has deteriorated further. Whether or not a recession can be avoided may well depend on how willing UK consumers are to spend the income windfall many are receiving on savings accounts, the returns on which have been substantially boosted by the interest rate rises delivered by the BoE and which are going a significant way in offsetting the spending drag from the higher mortgage costs many homeowners are facing. Plus, with wages now rising faster than prices, providing a real increase to household incomes, and the worst of last year’s energy price shock behind us, household and business confidence is starting to see a recovery, which ordinarily ought to translate into increased production and consumption.

Accordingly, we see the chances of the UK avoiding a recession or not as finely balanced. The outcome may well depend on whether or not the BoE is willing to hold its nerve and not raise interest rates again in the face of continued strong wages growth and CPI still above target, but now falling, or whether the scar of having got the ‘transitory’ inflation argument so wrong sees it willing to sacrifice growth on the altar of doing all it can to restore its inflation-fighting credibility. November's Monetary Policy Committee meeting never looked more complicated.