Jeremy Peat: 'The UK escaped recession –defined as two consecutive quarters of decline in GDP –but only just'

The UK escaped recession –defined as two consecutive quarters of decline in GDP –but only just. The economy did decline in Q2. Then a modest increase in output in the third quarter overall was the consequence of two months of decline and a positive July. The annual rate of growth dipped to a bare 1%, the slowest since the period when we were recovering from the 2008 financial crisis. Without that July surge, which could well be re-estimated away in the period ahead, the Government would have entered an election campaign facing headlines that the economy was ‘mired in recession’.

The outlook for the present quarter is likewise none too bright. The monthly CBI industrial trends surveys for both October and November were distinctly weak so far as both output volumes and new orders, the forward-looking indicator, were concerned.

Such growth as we have seen has relied upon the service sector for output and the consumer for demand. The monthly Purchasing Managers Index, which covers both services and manufacturing, is at a 3 or 4 year low, with a reading distinctly below 50, indicating an expectation of declining output ahead.

The demand side is also looking less robust, with unemployment gently rising (albeit from a very low base), the level of vacancies declining through 2019 and the rise in average earnings appearing to have passed its peak. There has been continuing concern about the quality of new employment opportunities. Further discouraging news is that the numbers of young people not in education, employment or training (the so-called ‘NEETs’) jumped in the third quarter of 2019. Increasing numbers of young men are now unemployed, while one in ten are self-employed. This rise in self-employment would be grand news if it were driven by highly skilled youngsters starting their own ventures. That appears, largely, not to be the case. This generation of self-employed can expect to earn less, work longer hours and experience much reduced security as compared to their employed counterparts.

No surprise then that two members of the Bank of England’s Monetary Policy Committee voted at their latest meeting for a cut in interest rates. The economic trend is at best for a continuing period in the ultra-low growth doldrums,

To re-iterate the message from recent columns, our economic problems are closely related to the continuing massive uncertainties hanging over businesses across the UK. What company can be expected under present circumstances to plan and undertake expensive investments in the UK to add to capacity or improve efficiency? Trading companies do not know what they will face in the years ahead, so far as any of their key markets are concerned. Nor can they have any sensible means of forecasting exchange rates. Sterling bounced back a touch when it looked as if a ‘no deal’ BREXIT was unlikely; but could easily sag back if that depressing prospect re-emerges as a distinct possibility.

Unfortunately the manifestos from, and other utterings by, our major political parties do not provide information as to how they intend to rescue the UK economy from its present sad and sorry state. The Conservatives repeat the mantra that under their stewardship getting Brexit done will come quickly and yield miraculous benefits. Sadly neither element of this mantra stands up to examination. Even if a Conservative government with an overall working majority can pass a divorce deal through Parliament in early 2020 that would mark the start rather than the culmination of the Brexit process. Hard graft over an extended period would still be required to work towards agreeing a continuing relationship with our EU friends on trade and much else. At the same time new deals would be essential with all our other trading partners, from the USA downwards. Those who understand trade deal negotiation far better than thee and me stress that there is simply no realistic prospect of such deals being negotiated by the end of 2020. The cloud of uncertainty would hang over our economy into 2021 and quite likely beyond. And the Tory manifesto is basically mute so far as other policies to restore confidence and drive investment and productivity are concerned.

Labour is offering a radically different alternative. Their manifesto is amazingly ambitious. To quote Paul Johnson the Director of the Institute for Fiscal Studies, ‘Labour …. want to change everything’. At least we now know that we do not know what their policy will be on Brexit! We do know a great deal about their incredibly grand plans on expenditure, taxation, moves back to public ownership and the like. We do not know over what timetable this might be achievable and what the impact of such dramatic change could be on our macro economy.

To again quote Paul Johnson ‘Neither [manifesto] is a properly credible prospectus.’ Whatever the outcome on 12th December we are not going to wake up on Friday the 13th saying that the worst is now behind us and clear blue water can be seen stretching ahead. An extended period of uncertainty and hence economic weakness lies ahead.