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This time is different

This time is different

Richard Conway Weekly bulletin October 2019
Feels familiar, doesn’t it? Seven months down the line and approaching another Brexit deadline with little to show for the delay. But while politics might seem static, the economic backdrop has moved on. The question is, will this time be different?
GDP growth

Casting our minds back to March, the situation looked reasonably good. Economic growth was holding up. Manufacturers were weathering the slowdown in global trade. Retail sales were robust. Even investment volumes were growing.

In Q2, the wheels fell off, and this morning’s Blue Book figures from the ONS confirmed the slowdown.

Revised growth numbers showed the UK economy contracted by 0.2% in the three months to the end of June 2019 as the effects of stockpiling waned and global trade concerns began to bite. Q1 growth was revised up slightly at the same time, from +0.5% to +0.6%, suggesting companies brought forward more activity than previously thought.

Consensus suggests this will be a blip and the economy will return to growth in Q3, avoiding a technical recession (defined as two consecutive quarters of negative growth). However, the reasoning is shaky.

Jam today, jam tomorrow

According to the latest inventories data, companies have run down their stockpiles over the course of Q2. Manufacturers have been particularly good at reducing the overhang, retail and wholesale firms less so. A narrowing of the current account deficit seems to confirm this, with imports falling following the Brexit delay earlier this year.

This should have created headroom for renewed no-deal preparations over the course of Q3 and the inventory cycle can begin again, albeit probably to a lesser degree this time around.

While helpful in avoiding another soft quarter, it’s hardly an attractive growth driver and risks introducing an unwanted degree of volatility, just at a time when businesses and investors crave consistency.

Consumers to the rescue, yet again

Labour market strength and generous pay growth should offer more concrete hope.

We’ve become accustomed to low unemployment, high vacancy rates and comfortably consistent growth in real incomes for some time now. But the worry has always been that stretched consumers can only do so much to prop up weakness elsewhere.

In that context, a sizable two percentage point upwards revision to household savings rates is encouraging, suggesting capacity to better absorb any future shocks to income without cutting spending. Encouragingly, spending was also up 0.4% over the period, showing that it’s not a direct trade-off, and that gains in real wages are beginning to be felt in the wider economy.

Broader concerns remain

Much work has clearly been done in the last three years to better diversify the sources of UK economic growth. It’s been a stated objective of both Mrs May’s government and Mr Johnson’s to encourage growth outside of the services sector and wean the economy off its reliance on consumer spending.

Recent weakness, however, has revealed a return to type. A lot done therefore, but plenty left to do if the government wants to build a broader base for GDP.

For more information, please contact Richard Conway, Director at Chatham, at rconway1@chathamfinancial.com.


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