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.
Main source of information: Company Report and Accounts, Bloomberg
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