I was mentored in economics by Sir Donald MacDougal who had been responsible for ensuring that there were adequate food supplies during WW2, monitoring shipping losses and estimating the impact on food inventories. He forced me to pay particular attention to the inventory cycle, something I have found a huge advantage in my 45 years of economic forecasting. On 19 Nov 2018 Cebr predicted ‘GDP likely to be boosted by 0.65% in Q4 and Q1 next year and then reduced by 0.4% between Q2 and Q4 next year, these swings will dominate GDP’. As predictions go that doesn’t look too shabby! GDP is currently recorded as having risen by 0.5% in Q1 and fallen by 0.2% in Q2.
As Julian Jessop points out in his excellent note, the entire fall in GDP in Q2 is recorded as having taken place in April when it fell by 0.5%. GDP is actually recorded as having risen by 0.2% in May and stayed flat in June. But it is worth noting that what that means is that GDP fell sharply in April, recovered a little in May but remained 0.3% below its March level in June.
The government’s inventory data suggests that the inventories at the end of Q2 were about £10 billion higher than might be expected normally. But the latest CBI survey says that for manufacturers ‘’stocks of raw materials (+2%) and work in progress (-2%) are expected to be broadly flat in the next three months, while stocks of finished goods (-13%) are expected to fall’. A large part of fluctuations in inventories is offset by trade movements (imports of goods were 10% down in Q2) so the impact of inventories on GDP is normally much less than it appears at first sight. But one should expect planned destocking in Q3 to be much less than in Q2.
What about the rest of demand?
The international outlook appears weak. The latest air freight data shows a 4.8% decline year-on-year in June. German GDP appears to have fallen in Q2, partly affected by Brexit. Business surveys worldwide are showing a pretty bad picture.
UK investment is unlikely to grow until Brexit has happened and been digested and may not even then.
The new PM is, as expected, loosening the purse strings but the gap between this and any activity taking place is at least a number of months. There will be an early Budget, probably in September, and tax cuts look likely, though there is a limit to what can be afforded. The quickest effect will come from a cut in stamp duty to revive the flagging housing market.
The monetary data doesn’t look particularly encouraging with M4 only 2.4% up on a year ago. Even the Flat White Economy, which on some measures is the UK’s largest economic sector, seems less dynamic than a year ago though data is more anecdotal than statistical.
So the short-term prospects depend a lot on the consumer. Here the news is not good. The latest YouGov/Cebr survey shows the consumer confidence index remains stubbornly low at 105.1. The Cebr theory is that the consumer credit cycle is out of sync with the real income cycle, leaving indebted consumers fearful of borrowing, even though their incomes are rising. The falling pound is probably making them spend more domestically than hitherto – most domestic tourism businesses are reporting strong demand while tourism abroad seems to be suffering. Other retail data from the British Retail Association and from John Lewis is bleak.
Net it’s likely that it will be touch and go whether GDP grows in Q3 and we avoid a technical recession. But with a probably disruptive Brexit around the corner and world growth flagging, UK GDP growth is likely to be very sluggish for most of 2019 and 2020. And if international circumstances don’t change, it may be a lot worse than this as equity markets look extremely fragile
Photo from Wikicommons