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UK likely to avoid recession in third quarter

UK likely to avoid recession in third quarter

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There were some positive developments for the global economy this week, with global markets reacting positively to reports that the US and China are preparing to de-escalate their trade war, and news of a broad stimulus package for the eurozone.

Fears of an imminent recession in the UK also receded slightly this week after the Office for National Statistics (ONS) released data showing that the economy grew by 0.3% in July, up from a zero reading in June. Over the three months to July, economic growth was flat, but that is an improvement on the 0.2% contraction in the three months to June. While the data is far from impressive, it does reduce the chance of a technical recession in the third quarter (Jul-Sept). A re-cession is commonly defined as two successive quarters of negative growth.

After the data was announced, developments in Westminster dramatically reduced the chance of a no-deal Brexit on Oc-tober 31 – a major concern for economists - after it was effectively legally blocked by the Benn Bill, which was given royal assent on Monday. The news should boost confidence and increase the chances of a more productive third quar-ter.

On Thursday, the European Central Bank announced a broad stimulus package to boost the flagging eurozone econo-my. It cut the rate of interest it pays on bank reserves by 0.1% to a new low of -0.5%, and introduced a tiering system to the negative deposit rate so that it only applies beyond a ratio of required reserves. This means banks are not penalised for keeping reserves that they are required to keep by law. The ECB also announced an open-ended €20bn-a-month quantitative easing program from November, alongside forward guidance that commits to keeping interest rates at cur-rent or lower levels until the inflation outlook approaches its target of 2%.

Meanwhile, China has said it will exempt 16 categories of US imports from the 25% tariffs it imposed on $50bn-worth of goods last year. The move is seen as a goodwill gesture ahead of the trade talks due to resume next month. Global share markets rose as a result. President Trump also delayed imposing some tariffs and mooted an interim agreement to ease tensions until a more permanent deal could be struck.

Meanwhile, the UK labour market continued to impress, with wage growth accelerating at its highest rate since 2008, and unemployment falling. According to data from the ONS, average weekly earnings increased by 4% in the three months to July, although that falls to 3.8% once the effects of bonuses are stripped out. Wage growth has now outpaced inflation for 18 months in a row, helping boost household finances and consumer spending power. The UK employment rate re-mained at the highest level since 1971 and unemployment dropped 0.1% to 3.8%.

 

 


 

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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.

 

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