According to figures released last week, Britain’s economy contracted by 0.2% in the second quarter of 2019. If figures later this year show another contraction from July to September, the UK will officially be in a recession – but how likely is it that the UK is heading for a recession?
Uncertain outlook
There have been numerous and ever-louder warnings that the UK might enter a recession in the immediate aftermath of Brexit. Of course, we haven’t left yet, but the effects of prolonged business uncertainty and lack of investment are now being felt in many sectors of the economy, particularly in manufacturing. The ongoing political crisis over Brexit and the increasing likelihood of an early general election will only prolong the uncertainty.
The Bank of England and the government’s own analysis still points to a disorderly no-deal Brexit having a significant and negative short-term impact on both the UK and EU economies, with both likely tipping into a recession before the end of the year.
With the recent drop in the pound against the euro and dollar, consumers in the UK could see a few more pennies added at the petrol pumps and in the supermarkets over the coming weeks, not to mention added expense for holidaymakers heading abroad and looking to exchange their currency.
The bigger picture
The global economy as a whole has been stagnating for over a year now, with China’s slowdown a particular cause for concern due to it accounting for a third of global growth. Additionally, the escalating trade war between the US and China and tension in the Gulf between Iran and the West is further hampering growth and damaging investor confidence.
Closer to home, Germany is on the brink of recession with a sharp decline in industrial output and Italy looks set to follow with zero growth and a mounting debt crisis, amid a time of rising tension among members of the Eurozone.
Can anything be done?
The Chancellor Sajid Javid looks set to announce an early budget to be held in September or early October which could include tax cuts or measures to help boost consumer spending, although it remains to be seen whether any of these could help. The treasury has also scrapped a planned 3-year spending review in favour of a 2020-21 budget to help government departments prepare for Brexit on 31 October.
Recently the Bank of England governor Mark Carney has indicated that the bank may consider moving interest rates downwards in a no-deal exit scenario, reducing the cost of borrowing for homeowners across the UK but also reversing recent gains for savers who continue to see dismal returns on their investments.
In any case, until business and investors regain confidence and the Brexit deadlock is broken in Westminster, it looks like the very real threat of recession will continue to loom large amid a gloomy economic picture not just for the UK, but the world as whole.
