It is unlikely that there will be a recession in the UK this year or in 2017.
In March, the Treasury forecast 2% growth for this year and 2.2% growth for next. Just before the referendum campaign began, the Treasury set out its fear that a Leave vote could put the UK into recession, owing to a possible shock to confidence and disruption to trade from such a decision. Most private-sector forecasters have followed the Treasury’s lead. Out of 32 private-sector forecasts Charles Stanley has examined, eight now expect a UK recession in 2017 with negative growth for the year. The most optimistic three only expect 0.7% growth.
Whilst it is still early days after the vote, so far the data implies that the Treasury’s March forecasts are closer to the likely outcome than the subsequent downbeat forecasts. At Charles Stanley we think the Treasury’s March forecast for 2017 could prove to be roughly right after all. Consumers have not reined in their spending in the first nine weeks after the vote, as feared. Any confidence effect would be at its most intense immediately the result was announced, and should ease over time, unless a sharp recession is generated quickly. The news from the house building market has also turned out to be good, with signs of activity increasing, not diminishing, and prices holding up.
As indicators, we look at money supply and credit. These started to accelerate in the second quarter of 2016. Annualising the quarter’s figure for money supply growth (M4) produces 8% compared to the trailing year growth of 6%. Credit rose 7.3% annualising the quarter, compared to 6.2% for the past year. There has now been a substantial devaluation of sterling, which will boost exports, tourist revenues and domestic substitution of imports. Devaluation acts as a monetary relaxation in its own right. The Bank of England has also loosened conditions further by cutting official rates and buying government bonds to drive interest rates lower. Government borrowing rates also fell sharply after the vote before the news of Bank intervention. These figures and actions point to reasonable growth this year and next.
Only a wider world recession or some big new event affecting the global economy could drag the UK into recession sooner.
It is true that early surveys of business opinion were strongly negative. The latest CBI Industrial Trends survey, however, was considerably better than expected. It points to good expansion of export orders, and is compatible with modest output growth in the months ahead. Claimant count unemployment fell in July, after less good figures in the second quarter of 2016. August and September figures will be watched with more than usual interest.
The Bank of England has produced a new forecast after the vote. In May, it feared recession if the UK voted to leave. Its recent forecast is for 2.0% growth in 2016 and 0.8% growth in 2017, with a slow winter in 2016-17. The Bank’s worries have centred on residential and commercial property, investment intentions and consumer expenditure. The Bank points to the fact that several open-ended property funds have closed as they need time to sell properties to meet requests for redemptions. There are, however, potential buyers of the units, which they are not allowing while the funds are closed, and potential buyers of the property they think they need to sell. Valuers believe commercial property is down in price, but some recent large transactions have still demonstrated considerable support for this market and relatively low yields for deals. It is difficult to see why there should be a large rise in property yields and a big fall in prices at a time of low and falling bond yields and ultra-low interest rates.
Some large companies may put some investment on hold, but others will need to increase capacity or improve facilities to deal with demand. There have been no changes to the arrangements for UK trade with the rest of the EU, and are unlikely to be any agreed changes in place this year or even next, given the slow pace of activity to make the legislative alterations to achieve UK exit from the EU. Overall we conclude the extent of the monetary stimulus means the UK should continue with moderate growth this year and next. Only a wider world recession or some big new event affecting the global economy could drag the UK into recession sooner.
The above article by John Redwood, Charles Stanley’s Chief Global Strategist, was first published by Charles Stanley on 25th August 2016.