A Q2 Decline That Was as Broad as It Was Expected
The extent of the q/q decline in Q2 GDP may have been unexpected, but the fall itself chimed with a range of indicators, not least the recent weakness in business survey data, of which the high-profile PMIs have been the most notable. Admittedly, the PMI data have been volatile and have not always been the most authoritative in forewarning about swings in the economy, at least those confirmed by subsequent official output numbers. However, the broad-based weakness in the PMIs, echoing the GDP numbers in showing marked declines in construction and manufacturing, as well as flagging services, is both important and illuminating. Firstly, it does not suggest that the UK is merely suffering from the global tensions that have hit manufacturing elsewhere. Secondly, such widespread weakness is less likely to be noise reflecting an unwinding of the Q1 Brexit-induced stock-build. This is especially so given corroborative evidence from other alternatively-sourced data, most notably the year-long fall in job vacancies (Figure 1).
Little Sign of Any Turn for the Better
This ongoing fall in vacancies, alongside business survey readings, suggests no letup in the economic slide as the current quarter unfolds. Moreover, the broad-based nature of the weakness highlighted by both official and survey data was last seen in 2012 (Figure 2) when the UK last courted genuine recession risks. It is worth noting that, in what was still a surprisingly upbeat assessment by the Bank of England (BoE) in its recent Inflation Report, the BoE still noted that the probability of the UK entering a recession by early-2020 had risen to one in three. This is notably the probability we have been attaching to such an outcome for some time.
Even so, at this juncture, it is more likely that the economy may avoid a further contraction, ironically because of the increased risk of a no-deal Brexit persuading both companies and households to rebuild precautionary inventories, albeit to less extent than seen in Q1. However, the situation may be touch and go, with key updates on the overall state of the economy in the form of monthly GDP figures (due on September 9 and October 10) likely to be important ingredients in what seems to be an emerging campaign ahead of a general election that we expect sometime in Q4, probably early in the quarter.
Figure 2: Broad-Based Decline in Output Now Unfolding
Source: Continuum Economics, ONS, Macrobond
Admittedly, Prime Minister Boris Johnson’s government will continue to play down any such signs of economic weakness, let alone contraction. It is already establishing a campaign that will seek to play off the electorate against the anti-Brexit Parliament while promising an abundance of electoral bribes (hence, a possible budget in late September or early October). However, any such economic weakness will clearly not help the government’s electoral aspirations however much it tries to maintain a pretense that the UK economy is fundamentally solid and immune to Brexit uncertainties.