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Financial Crisis: Britain One Step Away From First Recession

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The UK Has One Step Away From First Recession Since Financial Crisis

Much depends now on the state of business confidence between now and the next Brexit deadline in October.

Britain is now one step away from a recession.Anti-Brexit demonstrators wave EU and Union flags outside the Houses of Parliament in London

The economy shrank in the second quarter of the year and since a technical recession is defined as two successive quarters of contraction, that means another similar three months of growth between now and the end of September would tip the UK into its first recession since the financial crisis.

Many economists expected a weak quarter of growth in Q2. Indeed, the average forecast was for a flatlining of 0%.

It is the first time the economy has contracted since late 2012.

They knew that there was lots of stockpiling in the first quarter as companies prepared themselves for the first Brexit deadline; they knew after such moments the economy often contracts; they knew too that many factories had timetabled shutdowns for after that March deadline.

They knew it would be weak, but not this weak.

So why did the economy fare worse than those expectations?

In large, part of it is because each part of the economy fared worse than those expectations.

Not only did the manufacturing sector contract, it contracted at the fastest rate since the deep 2009 recession.

Moreover, the services sector, which provides around 80% of the growth in the economy, grew at a far slower rate than usual – the weakest rate in three years.

So this was a perfect storm – all parts of the UK economy slowing or contracting in unison.

However, there was one bright spot.

Despite the slowdown in spending and activity among businesses, household spending remains relatively robust, with growth around the same as in the first quarter.

Businesses may be battening down the hatches ahead of Brexit, but households are not.

Still, there is no reason to fear that the UK is inevitably heading towards a recession.

At present most economists expect an expansion in the third quarter of the year – perhaps around 0.3%.

That said, much depends now on the state of business confidence between now and the next Brexit deadline.

The final irony? We will not know for sure whether the UK is in recession until after that deadline has passed.