News ID: 257934
Published: 0724 GMT August 28, 2019

Recession looms for Britain

Recession looms for Britain
Boris Johnson seems intent on easing the public purse strings but the risk of a no-deal Brexit continues to hold back investment. PHOTOGRAPH: ANDREW PARSONS/EPA

GDP figures for the second quarter showed the UK economy going into reverse as some of the stock building that took place in the first quarter unwound and investment continued to fall. Exports also fell back, though this was offset by an even sharper drop in imports.

Consumer spending and government expenditure are helping to keep the economy afloat — a pattern we have seen for a while. With wage growth picking up and inflation remaining close to two percent, the growth of real disposable income is likely to continue to be supportive of consumer spending, The Guardian reported.

Retail sales volumes continue to increase modestly — with the volume of spending up 0.5 percent in the period May-July compared with the previous three months.

The new government under Boris Johnson also seems intent on easing the public purse strings, with almost every day seeing a new commitment to spending money — on health, education, social care and combating crime.

But the risk of no deal and the uncertainty surrounding Brexit more generally is likely to continue to be a drag on investment and trade. So we are likely to see a growing imbalance in the UK economy alongside very weak growth as rising consumer spending and government expenditure offset declines in investment and exports.

Rising trade tensions — particularly between the US and China — are also making the climate for exporters more difficult.

The Bank of England’s low interest rate policy is exacerbating the imbalances in the UK economy. It is supporting a new wave of borrowing and encouraging savers to look for more risky investments because the returns on normal bank and building society deposits are so poor.

A Brexit-driven recession in the UK may be avoided. But whatever happens, it looks like the British economy is set to become even more unbalanced in the years ahead.

There is still little clarity on whether the UK will be in or out of the EU in November, making Brexit the big story for the economy once again this month. It looks like a 50/50 bet. Businesses remain largely unprepared for a disastrous cliff-edge no deal and are in sit-and-wait mode while business groups continue to speak out against the economic chaos.

Brexit couldn’t have come at a worse time as the global economy slows at the end of a 10-year-long, weak recovery from the 2008 financial crash. Donald Trump’s trade war is having a negative impact in China and the US, and the UK and Germany may already be in recession.

It is hard to know how deep and long-lasting any recession will be, and whether the US will follow. The concern remains that policymakers have too little ammunition or political clout to do the necessary. Trump is in panic mode, fearing that a slowing US economy will ruin his re-election chances.

The CBI’s monthly survey showed that British retailers had the toughest month in August for more than 10 years. There were concerns that the risk of no-deal Brexit is keeping consumers out of the shops, which is bad news for the economy.

The UK unemployment rate ticked up to 3.9 percent while the number of unemployed rose by 37,000. The number of vacancies — which had been on the rise since 2012 — started falling at the start of the year and continues to fall. This suggests that maybe the UK labor market has started to turn down.

EU immigration has continued to fall since the Brexit vote and is now at its lowest level since 2013. This is mainly because of a decline in economic migration: The number of EU nationals arriving to work dropped to 92,000 in the year to March, less than half the peak of 190,000 in the year to June 2016.

In total, 7,000 more eastern European nationals left the UK than arrived. This is likely one of the main factors behind the recent spike in wages that have risen sharply. Average weekly earnings, including bonuses, were up 3.4 percent on the year. However, real earnings after inflation are still five percent below pre-recession levels.

 

   
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