12 November 2019
Economic indicators suggest a global recession is unlikely, and any resolution of the China-US trade war could provide further relief, says GAM Investments’ Charles Hepworth. However he believes the UK could be moving closer to recession territory.
With Brexit looming and all its attendant uncertainty, recession could be a very real possibility for the UK. Indeed declining domestic GDP and large-scale layoffs, which have contributed to the general public’s concern over the state of the British economy, suggest the UK could be close to entering a technical recession.
A recession is traditionally defined as the economy contracting for at least two consecutive quarters. The average length of a recession is 1.5 years; considering a full business cycle is approximately 4.7 years and that the last global recession ended in 2009, it could be argued one is overdue. Fears in the UK have been further magnified by the fact domestic GDP growth was negative in the second quarter of 2019, making Q2 the first contraction since the fourth quarter of 2012. Based on the technical definition, the UK is one bad quarter away from a full-blown recession.
Our view is that while certain markets might arguably have recessionary attributes, a global recession is unlikely to occur this year. The US economy remains strong, even as key European economies are in contractionary phases. That said, it is entirely possible the UK will enter a technical recession when third quarter numbers are announced in November.
We can look to the floundering services industry as a key indicator of the current economic state. The sector makes up about 80% of the UK economy, and in August it stalled uncharacteristically. Given the current political environment, it seems corporates are unwilling to make significant investment decisions given the lack of clarity around Brexit and the potential for restrictions on imports and exports. The overall uncertainty surrounding Brexit and the UK’s relationship with Europe has also contributed to falls in domestic construction and manufacturing sectors.
Globally, central banks are treading a fine line of avoiding investor panic, in our view. We have seen stimulus packages in the US and across Europe, as both the Federal Reserve and the European Central Bank utilise quantitative easing to aid their respective economies. In the case of the US, GDP growth has remained strong, up 2.1% in the second quarter of this year. The consumer price index, often used as a recession indicator, showed a 2.4% core increase in the 12 months through August. Based on these numbers, we do not anticipate the US will enter a recession any time in the near future.
Alongside the generally optimistic data, we feel investor sentiment is broadly positive outside of the UK. The resolution of the US-China trade war could provide some additional relief and rally the markets, particularly in regard to the US’s briefly inverted yield curve. Although historically an inverted yield curve has often served as the harbinger of a recession, this time around it is being somewhat contradicted by record high employment rates in the US and Europe (the UK included). Furthermore, an inverted yield curve tends to precede a recession by anywhere from 14 to 36 months, making an imminent economic fall unlikely.
The international climate is ambiguous, but we believe that the UK is the primary economy at immediate risk of entering a recession. The world’s largest economies (US, China and Japan) have remained strong so far, in particular the powerhouse US. The UK, on the other hand, has the particular issue of the Brexit paralysis. Consumers have become more risk averse, while businesses are reluctant to invest heavily when surrounded by such ambiguity lack of clarity over the outcome.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is no indicator for the current or future development.