Boris Johnson could be about to inherit a recession

 

There is a one-in-four chance that the UK economy has already slipped into a technical recession.

 

Coverage of the new forecasts we released today at the National Institute of Economic & Social Research (NIESR) focused, quite rightly, on our warning that there is a one-in-four chance that the UK economy has already slipped into a technical recession, with the possibility of a severe downturn in the event of a disorderly no-deal Brexit.

But away from the gloomiest Brexit scenarios, the underlying state of the UK economy does not make for cheerful reading. As prime minister, Boris Johnson is inheriting an economy already skirmishing with recession and a public administration barely able to implement plans.

The level of business investment since 2016 also indicates a form of seizure. Whilst attention is often focussed on the big questions of monetary and fiscal policies, the real business of government involves addressing matters such as the roads, schools, hospitals, housing, railways and broadband – and it is becoming clear that progress has stalled. In its most positive interpretation, leaving the EU may have offered a fresh start for national planning and re-orientation towards a new national direction – but if, on the other hand, decisions are not made and uncertainties resolved, we may find that the opportunities offered by a fast-changing and growing world may ultimately elude us.

The most recent international data supports this concern as the global output growth cycle may have peaked; and while we expect global GDP growth to continue, it will be slower than in the past two years. Tariff increases, trade disputes as well as some reduction in production in key emerging economies have contributed to slowing growth. Compared to our expectation at this time last year world growth in 2019 looks likely to be some 0.5 per cent less than we had anticipated.

The level of public and private indebtedness remains a key risk globally, despite many improvements in the management of financial claims since the financial crisis. While slightly faster wage growth in advanced economies and tighter labour markets raise the potential for higher inflation, the fall in oil prices in late 2018 should, with some loss in output growth momentum, prevent a widespread pick-up in inflation.

If low inflation persists, most central banks will have the option to increase monetary accommodation to support economic activity. But the persistent inability of policy rates to return to “normal” continues to indicate ongoing weaknesses in economic structures and is a source of concern.

Against a background of a deteriorating global outlook, which will remove one of the key recent supports for UK growth, the UK’s future relationship with the European Union (EU) remains unresolved. Brexit-related uncertainty and the deferral and divergence of investment plans will place downward pressure on activity, as has the reversal of stockbuilding from the first quarter of this year. Under our central forecast, based on a “soft” EU exit, chronic uncertainty and with some evidence of a sufficiently weak Q2 and Q3 for us to go on recession-alert, we expect GDP growth to be little above 1 per cent this year and next.

With inflation stable at target, and only limited evidence of domestic inflationary pressure, Bank Rate would remain at 0.75 per cent throughout this year before being raised to 1 per cent in the second half of 2020. I expect public spending to rise more quickly than currently planned. That, together with the reclassification of student loans in the public finances, is likely to mean that the government’s medium-term fiscal objectives will not be met. The current account deficit is forecast to improve somewhat from nearly 5 per cent of GDP in 2019 to around 3 per cent in 2020, as domestic saving picks up relative to investment. Simply put, economic performance remains subdued and prospects increasingly murky.

It might be argued by some that the economy has not yet palpably suffered from the risks and uncertainties to which has been subjected since the referendum. Clearly investment and the exchange rate have performed poorly, but employment remains buoyant. To the representative household, growth in income of 1 per cent per year may not seem to be so bad compared to 1.5 to 2 per cent per year, as long as it can have its one-and-a-bit jobs and pay its mortgage.

It is against this sanguine backdrop that the Institute’s forecast for negative GDP growth for Q2 caused many to think again. It may not be much of a surprise, given excess stockbuilding in Q1, but seems likely to mean that the new prime minister may not only have to face the same gambit from the EU’s negotiators – with the Irish border buffering against exit from the Customs Union – but also may have the backdrop on economy that no longer provides such obvious insulation against the case for a hard EU exit.

With the prime minster, the chancellor of the exchequer and the Governor of the Bank of England all to shortly change, it is little wonder that those making forward-looking plans are waiting or looking elsewhere if they can. The prospect of a “no-Deal Brexit” is concentrating minds and, although we expect a significant response by policymakers to such a shock, the long run impact of a loss of some 5 per cent of GDP in perpetuity means there will not be much economic joy from such an exit.

 

This comment piece was originally published in The New Statesman

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