Recession risks fade but Brexit still set to drag on growth

Jake Cordell
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The sun rising over the City of London
London's businesses bounced back from a post-referendum slump in confidence (Source: Getty)

Business activity rebounded in England and Wales last month, a new survey out today shows, confirming that the steep falls seen in the days immediately following the EU referendum have been reversed.

The Lloyds regional purchasing managers index (PMI) found that business activity in every region of the UK except Scotland returned to growth in August.

Across the UK, the PMI hit a five-month high of 53.6, back into the above-50 growth zone after dropping to 47.5 in July. Confidence among firms in the capital also roared higher, hitting 52.5 after sinking to a nationwide-low of 44.4 as the post-vote shock gripped City boardrooms.

“It’s good to see the measures of business activity rebounding in August with increases across all regions, shaking off the seven-year lows reported last month and back to their highest levels since the first quarter. A weaker pound since June has boosted exports and certain other activities,” said Tim Hinton, managing director of SME banking at Lloyds.

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The rebound comes as economists grow more confident that the UK will avoid recession.

Today the British Chambers of Commerce (BCC) also said the UK will “skirt with, but avoid, recession” over the next few years. In its first economic forecast since the referendum, the leading business group now expects the UK to grow by a healthy 1.8 per cent this year, down from a pre-vote prediction of 2.2 per cent.

Consultants at Oxford Economics also put the probability of the UK entering a period of contraction at 25 per cent, down from 30 per cent last week.

However, in a sign of what could be medium-term weakness ahead, the BCC is forecasting growth to come in at just one per cent next year, down from its 2.3 per cent April prediction. Overall, it believes the UK economy will be £44bn smaller by 2018 than it otherwise would have been.

“Mounting uncertainty is likely to put a brake on investment, while rising inflation and moderately weaker labour market conditions are expected to stifle consumer spending. On the upside, the UK’s net trade position is expected to be boosted by the post-referendum slide in the value of sterling,” said Suren Thiru, BCC, head of economics.

The BCC expects the UK will grow by just 0.1 per cent in the third and fourth quarters of the year - in line with the level at which the Bank of England has said it would cut interest rates even further to support the economy.

Read more: Mark Carney defends his recession warnings

Ratesetters on the Bank’s monetary policy committee (MPC) will meet this week to assess the latest fallout from the Brexit vote and take stock of how their multi-billion pound rescue package, unveiled in early August, has affected the economy.

Markets are not expecting further action just yet, although a cut to interest rates to around 0.1 per cent is priced in for November.

This week’s official inflation and unemployment statistics are expected to show modest signs of a post-referendum hit. The pace of price rises is forecast to have crept up from 0.6 to 0.7 per cent,​ while the jobs market is predicted to have lost some steam​ in July,​​ after the latest figures showed the employment rate was running at a record high in June.

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