The value of investments and any income from them can fall and you may get back less than you invested.

Bank of England warns of recession risk

Share

It has been a week of disappointing economic data, providing more evidence of a broad-based slowdown in the UK and Europe. Consequently, the Bank of England warned on Thursday that it saw a 25% risk of a UK recession later this year. Furthermore, the chances of France and Germany joining Italy in recessionary territory appear to be growing.

On Tuesday a series of surveys showed the UK economy slowing sharply and on Thursday the Bank of England downgraded its UK growth forecast for 2019 from 1.7% to 1.2% – the biggest drop since the financial crisis.

The flow of data began on Monday as the IHS Markit Construction purchasing managers’ index produced a reading of 50.6, sharply down from December’s level of 52.8. Any reading above 50 indicates the sector is still expanding but the fall in January has taken the index dangerously close to contractionary territory. 

On Tuesday the PMI report for the UK’s crucial services sector, which generates around 80% of UK growth, showed that growth in the sector had grounded to a halt, with an index reading of just 50.1, only marginally avoiding contraction. It was the sector’s worst reading since the EU referendum. The news follows the manufacturing sector’s reading of 52.8, released last Friday, which was its worst level in three months. The surveys suggest the UK economy is slowing sharply, with a composite reading of just 50.3. IHS Markit economist Chris Williamson warned that the UK economy is in its "weakest growth spell for six years" and said that “Brexit anxiety” was largely responsible for the slowdown.

The pound fell below US$1.30 on the news, which helped the FTSE100 rack up impressive gains on Tuesday.

However, it is not just the UK economy that is suffering. France’s composite PMI dropped further into contraction territory at 48.2, its lowest level in more than five years, and worse than the 48.8 recorded in Italy, which has been in recession since the end of 2018.

On Wednesday, German manufacturing data added to the downbeat mood. Factory orders were down 1.6% month-on-month in December, substantially below forecasts of a 0.3% increase. Orders were down 7% compared to a year earlier, according to Germany’s Federal Statistics Office.

As if to underline the point, the European Commission on Thursday cut its 2019 GDP growth estimate for the European Union to 1.5% in 2019 and 1.7% in 2020,  down from previous forecasts of 1.9% and 1.8% respectively.

The Bank of England left interest rates unchanged at 0.75% on Thursday as it unveiled its downgraded growth forecasts, caused, it said, by slumping business investment in light of Brexit uncertainties. In November, the Bank forecast business investment would grow by 2% in 2019 but it now expects it to fall by 2.75%.

The revised growth forecasts are predicated on a smooth Brexit but a disorderly withdrawal could plunge the UK into recession later this year. Conversely, if uncertainty around Brexit was lifted, growth could improve to 1.6% this year and 2.2% in 2020. The Bank forecast inflation to be 2.07% in two years’ time, from today’s level of 2.1%, and analysts now expect just one rate rise in 2019 instead of two.

 

Click here to read this week's Market Roundup and Company Focus

 

Important Notes:

Main source of information: Company Report and Accounts, Bloomberg

The value of investments and any income from them can fall and you may get back less than you invested. Past performance is not a guide to future performance and performance is shown before charges, which would reduce the illustrated performance. No investment is suitable in all cases and if you have any doubts as to an investment's suitability then you should contact us. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. In addition we reserve the right to act as principal or agent with regard to the sale or purchase of any security mentioned in this document. For further information, please refer to our conflicts policy. If you invest in currencies other than your own, fluctuations in currency value will mean that the value of your investment will move independently of the underlying asset. Any tax advantages or allowances mentioned are based on personal circumstances and current legislation which are subject to change. The opinions expressed in this document are not necessarily the views held throughout Brewin Dolphin Ltd. The information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness. Brewin Dolphin Ltd, a member of the London Stock Exchange, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Smithfield Street London EC1A 9BD. Registered in England and Wales no 215876.

Newsletter Signup

Stay updated

Receive email updates with news and views from Brewin Dolphin and information on our products and services.

Capturing your post code will allow us to tailor some of our communication to include regional views and updates that may be of interest to you.

We respect your privacy and take protecting it very seriously. We will only use your data in accordance with your preferences stated above. In keeping with our existing practice, we will never sell your personal data to any third parties.

If, in the future, you would like to update any of your marketing communication preferences, you will receive an email that will provide a link to our Preference Centre.

Brewin Dolphin will use the data you provide for the purpose of providing information about events, insights and services we offer.