Since 23rd June there has been a poll every hour on the hour to tell us how bad life will be. Bloomberg polled economists and found that three-quarters of them expect a recession in the UK. Retail Economics surveyed consumers and discovered that more than half plan to reduce their non-essential spending. What should one believe or not believe? Here are three initial surveys from reputable sources.
Lloyds Bank has been publishing a business barometer each month since January 2002. The latest survey was conducted in the days after the EU referendum and business confidence fell from +32% to +6% and forward-looking economic optimism sank from +26% to -11%. The chart shows that this survey tracks the economy pretty well and is indeed consistent with a UK recession in the second half of 2016.
However, the barometer gave a false signal in 2011 during the eurozone debt crisis, sinking from +41% in June 2011 to -3% by year-end but rebounding to +36% by March 2012. In addition, Lloyds point out that the industrial sector (boosted by sterling’s fall) fell by less than services and that hiring plans remained “surprisingly resilient”.
YouGov and the Centre for Economics and Business Research (CEBR) jointly publish a business confidence index. Now we do not have a track record here and opinion pollsters have not performed especially well recently but the pre- and post-referendum results highlight one key point. The business confidence index was down 7.6 points, the own company optimism index 9.3 points and the economy optimism index 18.3 points. This is an example of the “I am alright but I am worried about other people” survey phenomenon. In other words, surveys just after a shock may exaggerate the likely economic impact.
Turning to consumers, the GfK confidence survey dates back to 1974. Its post-23rd June poll showed the sharpest drop in confidence since 1994, with 60% of those surveyed expecting the economic backdrop to worsen over the coming year.
However, the chart shows that this index is not a reliable guide to consumer spending volumes. The rule of thumb in econometrics is that personal consumption is largely explained by incomes, with minor contributions from wealth and confidence. Consumers may be unhappy but that need not stop them spending. Retail therapy anyone?
Pulling these three threads together, it is clear that there will be a materially lower path for UK growth. However, this does not look like a “Lehman moment”. For now, we stick with the view that we shall see stagnation rather than a recession but, even so, the Bank of England is still likely to cut interest rates on Thursday.