Recession risks fade on upbeat post-referendum data

Jake Cordell
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It'll be all smiles in Whitehall if Hammond and May can help the UK avoid a recession
It'll be all smiles in Whitehall if Hammond and May can help the UK avoid a recession (Source: Getty)

Economists believe the chances of the UK economy slipping into a post-referendum recession have slipped, following a steady stream of upbeat economic data.

Figures out early last week, compiled before a raft of bumper employment and retail sales statistics had been released, showed the consensus estimate for the UK economy was a 1.6 per cent expansion this year followed by 0.7 per cent growth in 2017. Both forecasts were revised up from the 1.5 per cent and 0.5 per cent which experts at city institutions and think tanks had been predicting in July.

Following the immediate shock of the UK's vote to leave the EU, a number of survey indicators, including confidence monitors and the closely-watched purchasing managers' indexes (PMI) swung to lows not seen since the financial crisis. However, official data out last week did not point to an immediate or sharp contraction. The claimant count - a measure of unemployment - dropped in July, against expectations for a slight increase, and retail sales grew by a "barnstorming" 1.4 per cent over the month.

"Claims that the vote to leave the EU would quickly result in a rapid deterioration in the economy have not been supported," said Martin Beck of Oxford Economics.

Latest forecasts

GDP growth Deficit
2016 1.6 per cent £69.2bn
2017 0.7 per cent £63bn

Median of 21 economic forecasts, as collated and published by the Treasury

Howard Archer of IHS Global added: "We had feared that the economy could stagnate in the third quarter following June's Brexit vote, but this possibility has been substantially diluted by retail sales volumes jumping."

Even disappointing figures on the UK's public finances, which showed only a £1bn surplus in July - around half the level many had been expecting - "do not point to an economy in freefall," said Investec's Victoria Clarke, who also noted the "strong employment data" and "barnstorming" retail sales figures as bright spots.

Nevertheless, economists have not completely ruled out the prospect of the UK dipping into a technical recession, defined as two consecutive quarters of negative growth, over the next 18 months.

Read more: Chief ONS wonk says recession still possible

Clarke, at Investec, said: "The initial effect of post-referendum uncertainty will be seen among firms rather than households ... the double income hit to households from weaker employment and higher inflation is yet to come."

Economists also expect chancellor Philip Hammond to loosen the purse strings in his Autumn Statement later this year in order to prop up the economy. He has already scrapped George Osborne's plan to run a budget surplus by the end of the parliament, and analysts are predicting the UK's shortfall to run at more than £60bn both this year and next year against official government projections made in March of £55bn in 2016 and £39bn in 2017.

Hammond has resisted calls to hold an emergency post-referendum budget or to bring forward his first Autumn Statement, the date of which is still unknown. Many expect him to cut VAT to prompt spending and also announce a raft of new investment spending when the new chancellor does deliver his first post-vote spending review.

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