July’s better-than-expected GDP data suggest economy not slipping into recession

In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses the latest UK data:

  • GDP rose by a better-than-expected 0.3% (MOM) in July, calming fears of recession following the negative growth in 2019Q2.
  • NIESR projected an increase of 0.3% (QOQ) for 2019Q3, whilst the Bank of England’s MPC expected a 0.2% (QOQ) rise.
  • August’s retail sales slipped 0.2% (MOM), but the growth in the three months to August was 0.6% (QOQ). Retail sales should, therefore, contribute to GDP growth in 2019Q3.
  • The trade deficit fell in the three months to July, even allowing for distortions in the figures. Excluding the distorting “unspecified goods”, the deficit narrowed by £3.7bn to £4.7bn.
  • The labour market remains robust, even though employment growth is slowing and vacancies are easing from a very strong level. The unemployment rate was 3.8% in the three months to July; it has not been lower since 1974Q4.
  • Real earnings growth (total pay) was 2.1% (YOY) in the three months to July.
  • Inflationary pressures seem well contained. CPI inflation fell to 1.7% in August, whilst PPI (output) inflation moderated to 1.6%. PPI (input) inflation fell to minus8%, reflecting lower crude oil prices. However, given the firmer oil prices following the recent attacks on the Saudi Arabian oil complexes, this may be reversed.
  • House price inflation fell to 0.7% (YOY) in July, the lowest since September 2012.

Concerning the Central Banks:

  • The ECB announced a package of loosening monetary policy measures on 12 September, including a cut in the deposit facility rate and the resumption of net purchases under its Asset Purchase Programme (APP). ECB President Draghi cited concerns over the slow-growing Eurozone economy and the persistence of sub-2% HICP inflation.
  • The Fed cut the federal funds target range by 0.25% to 1.75%-2.00% on 18 September, citing “uncertainties” about the economic outlook.
  • The Bank of England left monetary policy unchanged on 19 September.

Finally, the OECD downgraded its growth projections again in its September interim economic outlook. It projected that the global economy would grow by 2.9% in 2019 (3.2% in May) and 3.0% in 2020 (3.4% in May). These forecast growth rates would be the “weakest since the financial crisis, with downside risks continuing to mount”. Growth had been revised down in almost all G20 countries in 2019 and 2020, particularly those “most exposed to the decline in global trade…that has set in this year”, including Germany.

Ruth Lea said, “…the rise in July’s GDP was fairly encouraging – especially after the dire warnings about recession in the wake of the 0.2% (QOQ) fall in 2019Q2, which was more of a correction following the above-trend 2019Q1 figure. The economy should avoid recession this year. Moreover, a combination of robust employment and rising real earnings should sustain household spending growth, and hence GDP growth, going forward.”

Ruth Lea CBE has been Arbuthnot Banking Group’s Economic Adviser since 2007 and was an Independent Non-Executive Director from 2005-2016.

Ruth co-founded Global Vision in 2007 and was Director until 2010, and was previously the Director of the Centre for Policy Studies (from 2004 to 2007), Head of the Policy Unit at the Institute of Directors (from 1995 to 2003) and Economics Editor at ITN (from 1994 to 1995).  Prior to ITN she was Chief UK Economist at Lehman Brothers, Chief Economist at Mitsubishi Bank, worked for 16 years in the Civil Service (the Treasury, the DTI, the Civil Service College and the Central Statistical Office) and was an economics lecturer at Thames Polytechnic (now the University of Greenwich).

She is the author of many papers and articles on economic issues and has been a Governor of the London School of Economics and Council Member of the University of London.

Tel: 020 8346 3482
Mobile: 07800 608 674
Email: ruthlea@arbuthnot.co.uk

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