Can the UK avoid recession?

Posted: July 7, 2016 in Brexit, UK Economy
Tags: , , , , , , ,

file4741270417603The UK can be thankful it has experts at the Bank of England, because its seems that they are all that stand between the UK economy and recession.

Ever since the result of the EU referendum was revealed, economic forecasters have been warning of the possibility, and in many cases the probability, of a UK recession later this year.

Indeed, before the referendum, Bank of England governor, Mark Carney, warned of precisely that danger. But then Mark Carney, along with the rest of the economic forecasters, is a so called expert, and as we all know in this post referendum era, they know nothing.

But maybe, we can ignore experts and instead look at the data.

The monthly purchasing managers’ indices, or PMIs, covering UK manufacturing, construction and services are a reasonably reliable guide to the state of the economy at any one time. They are not perfect, but then again nothing is, and when they pick-up, the UK economy seems to pick-up soon afterwards and when they fall, the UK economy usually dips soon afterwards.

The latest batch have been released in the last few days, and they were awful.

The good news is that of the three PMIs, the first to see the light of day, the PMI covering manufacturing, wasn’t too bad. The index rose to 52.1, a five month high.  It was good to see the index rise, but even so, by historical standards, it was a pretty lacklustre score.

Bear in mind, that when it comes to PMIs, the magic number is 50. Any score over is meant to suggest expansion, any score below is meant to suggest contraction.

And that takes me to the PMI tracking construction. In June, the index crashed, falling from 51.2 in May, which itself was seen as pretty woeful, to 46.0, that’s the lowest reading since December 2012.

Then, finally we got the PMI for services. The Business Activity Index which experts tell us is the index that matters – not that they know anything – fell from 53.5 in May to 52.3 In June, the lowest reading since December 2012.

Collectively, and based on past findings, the three PMIs point to growth of just 0.1 per cent in Q2. A recession is defined as two successive quarters of negative growth, so if the PMIs are accurate, then the UK only needs to slow very slightly from the June level and it’s in recession territory.

Most worrying of all, the three PMIs relate to a period before the EU referendum.   It seems likely that the UK economy has slowed more than slightly since then.

But not all are fretting.

Take Standard and Poor’s. It has taken time off from downgrading the UK’s credit rating, to suggest that the UK will avoid recession. It said that the fall in the pound will support exporters, that the UK chancellor, a certain George Osborne, will relax on his austerity drive, but most important of all, the Bank of England will cut interest rates and go for another burst of QE.

But the story of pound devaluations giving the UK economy a lift is mixed. Besides, sterling’s falls against the euro have been more modest.

George has already confirmed that he will go back on his pre-election promise to create a budget surplus by the end of the decade.

But it seems to me that the fate of the UK economy in the short term, and whether it can avoid recession, is dependent on the experts at the Bank of England. Let’s hope that really do know something after all.

Article originally posted on Fresh Business Thinking:  http://www.freshbusinessthinking.com/can-the-uk-avoid-a-brexit-recession/

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s