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  1. Politics
3 August 2016

Chance of a recession “a coin toss“ – 6 signs Project Fear was right

The NIESR forecast is the latest in a series of grim readings. 

By Julia Rampen

The chance of the UK entering a recession is “on a coin toss”, according to Simon Kirby, an economic forecaster at the National Institute of Economic and Social Research. 

He said: “There is round about a 50/50 chance of two consecutive quarters of contraction from now into 2017.”

NIESR predicts that GDP will grow by 1.7 per cent in 2016, before slowing to 1 per cent in 2017. But these positive growth figures disguise an expected decline of 0.2 per cent in the third quarter of this year. A recession is usually defined as two consecutive quarters of negative growth.

Kirby said: “There was a broad consensus among economists before the EU referendum that leaving would lead to a downturn.

“I do think we are already in the first phase of this.”

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In other words, Project Fear could turn out to be Project I Told You So.

In the City, wonks are already trying to shield the economy from the continued uncertainty – the Bank of England is widely expected to cut interest rates for the first time in years.

Because of the lag in economic data, information about the economy post-Brexit is still trickling out. But here is what else we’ve learnt so far:

1. Manufacturing output is down

UK manufacturing activity fell in July to the lowest level since 2013, with the decline in production the steepest since October 2012, according to the Markit manufacturing PMI index.

Markit senior economist Rob Dobson said: “The pace of contraction was the fastest since early-2013 amid increasingly widespread reports that business activity has been adversely affected by the EU referendum.”

2. And so is services activity

Output in the UK’s major services economy shrank in July for the first time since December 2012, and the rate of decline was the strongest since March 2009, according to the Markit services PMI index. 

Markit chief economist Chris Williamson said: “Services providers are certainly bracing themselves for worse to come, with a record drop in business confidence about the year ahead leaving optimism at its lowest ebb since February 2009.”

3. Commercial property market is jittery

The bulk of surveyors polled by the Royal Institute of Chartered Surveyors in July felt that the commercial property market was in the early stages of a downturn.

Also in July, a number of high profile funds investing in commercial property introduced restrictions to stop customers pulling out their money. 

4. High street sales are falling

Retail sales fell at the fastest pace in more than four years in July, according to the Confederation of British Industry. 

Orders placed with suppliers also dropped at the quickest pace since March 2009 and are expected to fall further in August.

5. Confidence in banks is down

While the FTSE indices have sprung back from their crash post-Brexit, certain stocks are still ailing. The price of shares in Lloyds Banking Group are still 26.5 per cent down on 23 June, while shares in RBS are down 22.8 per cent.

Lloyds boss Antonio Horta-Osorio announced in July that the bank would shed another 3,000 jobs and close 200 branches. While the decision was taken before the EU vote, Horta-Osorio warned: “Following the EU referendum the outlook for the UK economy is uncertain.” 

6. Businesses are delaying investment

The Bank of England’s agents found that some businesses are beginning to delay investment projects and postpone recruitment decisions. 

The Bank concluded that, taken together with the creaking housing market: “These indicators suggest economic activity is likely to weaken in the nearer term.”

 

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