Proactive Investors - Getting economists to agree can be a tricky business. But while the debate about will and when the UK enter recession continues they do agree that the economic picture remains far from rosy.
There is a chance that the UK economy could enter a technical recession – defined as two consecutive quarters of negative growth – when the GDP figures for December are released.
But after a surprise rise in November’s growth figure the Office for National Statistics estimated that it would need a fall of 0.6% in economic growth in December for the fourth quarter to post a fall as a whole after the decline in the third quarter.
Possible given that the bounce in November’s figure reflected a jump in the services sector boosted by the World Cup whilst December saw waves of industrial action and disruption from the cold weather.
But perhaps the obsession with the “R” word is overdone anyway. Indeed, given the lagging nature of statistical data, and aside from extended downturns, a recession can be on the way out by the time it has officially happened.
PMI points to fall in GDP in Q1
Nevertheless, what is clear is that the economy is slowing and most, if not all, economists expect the UK to enter a recession at some stage.
Today’s fall in the PMI figure to a 24-month low highlighted the risks that this could happen in the first half of the year, if not before.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said the data “underscore the risk of the UK slipping into recession.”
“Industrial disputes, staff shortages, export losses, the rising cost of living and higher interest rates all meant the rate of economic decline gathered pace again at the start of the year” he noted.
While Pantheon Macroeconomics, senior UK economist, Gabriella Dickens said the figures suggested GDP is still “on a downward trend, as real incomes continue to fall” adding the fall in the composite PMI was consistent with a 0.2% quarter-on-quarter contraction in real GDP in quarter one, if it holds steady for the rest of the quarter.
She estimated the figures appeared “to be broadly consistent with our forecast that GDP will fall by 0.3% quarter-on-quarter in quarter one and by a further 0.6% in quarter two.”
Sterling to come under pressure?
"At best, the UK economy will stagnate this year. Realistically we're likely to see a recession at some point," said Simon Harvey, head of FX analysis at Monex Europe.
"As we start to see the economic reality coming through, this will likely lead to sterling underperforming over the coming months," Harvey added.
This was also seen today with the pound falling back against the US dollar, easing 0.4% to $1.233.
But there was also hope. At Pantheon, Gabriella Dickens said the silver lining to the survey was that it strengthens the case for the Monetary Policy Committee to stop hiking Bank Rate soon.
The EY ITEM Club agreed, it expects the “rate raising cycle will soon come to an end, with Bank Rate peaking at 4% early this year.”
Better news in the detail
JPMorgan (NYSE:JPM) economist Allan Monks had an even brighter take on the figures highlighting the broader resilience in the detail.
He said “the current level of the PMI is not empirically consistent with a recession – which typically sees the survey drop to around 46 or below.”
Moreover, the details of the report were some way better than the headline, he noted.
He highlighted a rise in new orders, a jump in the employment reading and a leap in the year-ahead future output number.
“This should help to further allay fears that the UK is entering a job shedding episode and full recession scenario in the near term, especially with gas prices falling and inflation heading lower” he stated.