UK in recession, don’t panic

UK in recession, don’t panic

Invitation to the Deloitte Academy webinar this week:  AI and the Future of Employment – Assessing the Impact on Jobs. Professor Carl-Benedikt Frey, Associate Professor of AI & Work at the Oxford Internet Institute, will join me this Wednesday to share his thinking on the impact of GenAI on nature and the future of work. This session will take place on Wednesday, 21 February, from 0900–1030 GMT. To register, for what I think will be a fascinating session, please visit: https://deloitte.zoom.us/webinar/register/7317071434521/WN_aO47Lj7ZSmutCzrwpuFhGQ#/registration

• Official data released last week showed that the UK economy fell into a 'technical' recession at the end of 2023. GDP contracted in the third and fourth quarters of last year, satisfying the most commonly used criterion for determining recessions - two consecutive quarters of negative GDP growth.

• Even if last week's data had shown that the UK had dodged a recession, the bigger picture would still be one of prolonged stagnation. The UK economy has barely grown since early 2022. It has been close to recession for some time and, in the second half of last year, finally slipped into one. Last week’s GDP numbers are a belated acknowledgement of the difficult economic environment many people have struggled with for some time — with higher food, energy and mortgage costs squeezing household spending power.

• The irony is that this acknowledgement comes just as the economic outlook seems to have brightened. Inflation is on a downward trajectory; real earnings are rising and mortgage rates have fallen back. Newly revised data show that, remarkably, unemployment fell through the second half of last year just as the economy moved into recession. Consumer and business confidence have risen in recent months signalling that many feel the worst is past.

• This apparent disconnect between the GDP data and the real economy raises the question of how recessions are defined. Some argue that defining a recession as two or more quarters of negative GDP growth will, on occasions, create situations in which a technical recession occurs at a time when the rest of the economy is in reasonable shape.

• Critics point to what they see as a superior system for identifying recessions in the US, where a panel of economists, at the National Bureau of Economic Research (NBER), examine a number of economic indicators in addition to GDP. The panel assesses whether there has been a broad-based decline in activity, lasting long enough to warrant the term recession. The NBER panel ruled that the two quarters of contracting US GDP in the first half of 2022 did not constitute a recession since it coincided with an unusually strong jobs market. That proved prescient. US GDP growth accelerated rapidly from the second half of 2022 and 2023 proved to be a good year for the US, with GDP growth of 2.5%.

• The US experience in 2022 was unusual in that two quarters of falling GDP was followed by an upswing. If GDP contracts for a couple of quarters, and is not subsequently revised up, a deep downturn is on the cards. In the last 50 years, the simple two-quarter definition has flagged each of the UK’s five major recessions. Truly technical two-quarter recessions, which inflict little serious damage, are the exception. We must hope that the decline in UK GDP in the second half of last year proves the exception.

• The US approach to calling recessions seems more considered and better rooted in economic theory than the two-quarter definition. The snag is that the US measure is not timely. During the global financial crisis, the NBER panel called the US recession a full year after it had begun. The simpler definition, commonly used around the world except in North America and Japan, determines a recession as soon as the GDP data are announced.

• It may be that last year’s UK recession will be revised away. The first estimate of GDP is a snapshot, and is subject to large revisions which can continue for years after the initial publication as more and better data become available and as methodologies are revised.

• The latest revision to UK GDP growth in the second quarter of 1992 occurred, for instance, last September, so more than 30 years ago after the initial estimate. The scale of revisions can be material. The so-called double-dip recession of 2012, which occurred in the wake of the global financial crisis, showed a sizeable 1.0% contraction in GDP in the first half of that year. Not only was that technical recession revised away, the current estimate shows that GDP grew by 0.8% in the first half of 2012. Revisions transformed a serious recession into healthy growth.

• We cannot count on the UK’s latest recession being revised away. But our current forecast envisages this recession will end up as a pretty modest affair with UK contracting by a total of 0.6%, a fraction of the 5% average contraction seen in the UK. We see growth coming back in the summer months and the economy expanding in the second half of this year.

• That would constitute a very mild recession. But this relatively benign outturn could be demolished if inflation proves hard to break. Last week saw the release of the latest labour market data, with average wages growing at almost 6% annually and job vacancies at historically high levels despite recent declines. Wage growth of 6.0% is not consistent with the Bank of England’s 2.0% inflation target. As Andrew Bailey, the Bank’s governor said last week, the supply side remains "very constrained" suggesting underlying price pressures are far from spent.

• Sticky inflation and rapid wage growth could force the Bank’s hand, leading to further rate rises and upping the odds of a serious recession. It is not the most likely outcome, but it is a big risk to growth this year.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week up 1.8% at 7,712. The index shrugged off the news that the UK had entered recession and was buoyed by strong retail sales figures that suggested the economy is picking up momentum.

Economics

• US inflation fell to 3.1% in the 12 months to January, a lesser fall than had been expected. Bond yields rose slightly on the news 
• The UK economy contracted by a greater-than-expected 0.3% in the last quarter of 2023. With output also estimated to have fallen by 0.1% in the third quarter, the UK economy entered a technical recession (defined as two consecutive quarters of contraction)
• UK inflation remained unchanged at 4.0% in the 12 months to January. On a monthly basis, consumer prices fell by a greater-than-expected 0.6% from December to January
• The UK unemployment rate fell to 3.8% in the final quarter of 2023 and nominal earnings growth remained strong at 5.8%. The Office for National Statistics continues to urge caution over the figures due to continuing problems with the Labour Force Survey
• Reports in the press suggested that UK chancellor Jeremy Hunt was downplaying the possibility of substantial tax cuts in the March budget following a deterioration in the outlook for public finances
• UK retail sales rebounded, growing 3.4% in January following a fall of 3.3% in December
• Regulator Ofgem is expected to announce a cut of 15% to UK domestic energy prices when it shares its revised cap for the second quarter on Friday, according to analysts at Cornwall Insights. The cut is expected to contribute to a fall in the inflation rate from April
• The euro area economy narrowly avoided a recession as it posted flat growth in the final quarter of 2023

Business

• French energy giant EDF reported a €13.9bn impairment charge related to the construction of Hinckley Point C nuclear project following delays and cost overruns
• The FT reported that the EU commission will impose its first ever fine on Apple for allegedly breaking EU law over access to its music streaming services. Citing “five people with direct knowledge” of the investigation the FT said the fine would be about €500m
• British retailer The Body Shop called in administrators putting up to 2,000 jobs at risk. Private equity owner Aurelius, who had only acquired the business in November, blamed disappointing Christmas trading
• Two large investors said that a tribunal decision that the freeholder of a residential development in the former Olympic Village in London should contribute £18m to post-Grenfell fire safety work risked international investment into UK residential property
• UK bank NatWest reported its highest annual pre-tax profit in 16 years as the margin between its lending and deposit rates improved
• European Commission president Ursula von der Leyen called for increased production and consolidation in the defence industry, saying: “We have to spend more, we have to spend better, we have to spend European.”
• Couriers and drivers at Just Eat, Deliveroo, Uber and Lyft in the UK and North America took strike action on Valentine’s Day to call for better pay
• The cost of shoplifting in the UK doubled to £1.8bn in 2022–23, according to figures from the British Retail Consortium

Global and political developments

• The Russian prison service announced that opposition politician Alexei Navalny died in an Arctic penal colony. US secretary of state Antony Blinken said that “Russia is responsible for this”
• The UK opposition Labour Party won two by-elections on huge swings, highlighting the challenge the ruling Conservative Party faces in forthcoming elections
• The Reform party won over 10% of the vote in both by-elections, a record result. Honorary president Nigel Farage said he believed that Conservative Party members would choose him as their leader over prime minister Rishi Sunak
• Ukraine announced that they had sunk the Russian amphibious assault ship Caesar Kunikov
• The Director of the FBI said that Chinese government efforts to covertly plant malware inside US critical infrastructure networks are now at “a scale greater than we’d seen before”. Christopher Wray said China was pre-positioning malware that could be triggered to disrupt US infrastructure
• US speaker of the House of Representatives, Mike Johnson, adjourned the House for two weeks without approving a $60bn package of aid to Ukraine. Mr Johnson is seen as an ally of former president Donald Trump, who has been critical of aid to Ukraine
• A New York court has fined Donald Trump $350m for misrepresenting the value of his business. With interest and other costs, the fine could rise to more than $450m. This fine is in addition to the $83m payment Mr Trump has been ordered to pay the writer E Jean Carroll for defamation after he was found liable for sexually abusing her in the 1990s
• A New York judge set 25 March as the date when Donald Trump will face a criminal trial over allegations surrounding payments made to the actress Stormy Daniels. The case is the first of four pending criminal cases against the former president to reach trial

And finally… firearms officers were dispatched to a hotel in Enderby, Leicestershire following reports of a man carrying a large knife. The situation was swiftly resolved after it transpired that the man was in fact a Harry Potter fan carrying a large wand – Hermione Danger