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UK may already be in recession, as Brexit bites

UK may already be in recession, as Brexit bites

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Economic developments this week pointed to increasing trade tensions and a slowing global economy. There is also a chance that the UK has entered a recession after three surveys measuring activity in the biggest sectors of the economy all suggested the economy contracted in September. If accurate, it could mean that the UK economy as a whole contracted by around 0.1% in the third quarter, according to IHS Markit, which conducted the surveys. That would follow on from a 0.2% decline in the three months to the end June, and would therefore mark two consecutive quarters of economic contraction – the technical definition of a recession.

The UK’s problems have been largely blamed on Brexit uncertainties but the slowdown in global trade has also hindered business. The IHS Markit/CIPS manufacturing PMI showed that the UK manufacturing sector rebounded slightly in September but remained firmly in contraction territory. It produced a reading of 48.3 in September, compared to the six-year low of 47.4 in August. The slight improvement was attributed to an increase in activity ahead of the 31 October Brexit deadline. The report was followed by another PMI survey on the construction sector, which produced a reading of 43.3, down from 45 in August. Joe Hayes, an IHS Markit economist, said the construction industry was “mired in a downturn” and was heading for an extended slump. Finally, the IHS Markit/CIPS survey on the key UK services industry, which accounts for around 80% of UK economic growth, produced a reading of just 49.5 in September, and means all three measures of economic activity released this week suggest the economy is shrinking. The news comes as Boris Johnson’s “final offer” to the EU received a lukewarm reception, and the Irish Prime Minister said the proposals “fall short in a number of aspects”. It looks unlikely to be approved in its current form before the 31 October deadline. Johnson is required to request a delay unless a deal has been agreed by 19 October.

Germany appears to be on the verge of recession as its services sector contracted more than expected in September and its “composite output” index measuring broad economic activity fell to 48.5 in September from 51.7 the previous month, according to IHS Markit. The broader eurozone economy is also virtually stagnant. More worryingly for global markets, the chances of a US recession appear to be increasing after the Institute of Supply Management (ISM) revealed that its index of US factory activity dropped 1.3 points to a level of 47.8 in September, its worst result in 10 years. Technically, the manufacturing index reading needs to fall below a level of 42.9 to signal a recession in the broader US economy – so a recession is still a way off by some measures, but analysts said the trend means that the risks were rising. The news has led markets to price in an 87% chance of another interest rate cut when the Federal Reserve meets at the end of October.

On the housing market, Nationwide Building Society says that average UK house prices fell by an annual rate of 0.2% in September, and by 1.7% in London, as Brexit uncertainties bite.

 

 


 

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