Fears of recession subside after economy bounces back in July


Fears that Britain could fall into recession have eased after the economy stabilised in July.

Official figures published yesterday showed that output was flat in the three-month period, having fallen by 0.2 per cent in the three months to June.

On a month-by-month basis, the economy grew by 0.3 per cent, beating economists’ forecasts of 0.1 per cent, the Office for National Statistics said.

Most sectors contributed to growth in July, with manufacturing growing by 0.3 per cent and construction expanding by 0.5 per cent. Services output, which accounts for about 80 per cent of the economy, increased by 0.3 per cent after being flat in May and June.

Although the latest figures suggest that the economy has held steady after shrinking in the second quarter, Britain will not find out if it has avoided a recession until early November, when the ONS publishes GDP figures for the third quarter of 2019. A recession is defined as two consecutive quarters of falling GDP. The widely followed purchasing managers’ index figures published for August suggest that the economy performed poorly last month.

Sir Charlie Bean, senior macroeconomist at the Office for Budget Responsibility, said yesterday that third-quarter growth could be higher than the OBR’s official forecast of 0.3 per cent.

“It is highly unlikely that the third sector will show another contraction,” he told MPs on the Treasury select committee. “I’d be surprised if the third quarter number isn’t something like 0.3 or 0.4 per cent.”

Robert Chote, chairman of the OBR, said that last week’s spending round, which revealed an extra £13.8 billion of expenditure, made it more difficult to eliminate the budget deficit by the middle of next decade, as mandated in law. In March, the fiscal watchdog warned that the government risked missing the target. “Any additional spending would take further away rather than closer to it,” Mr Chote said.

The National Institute of Economic and Social Research has upgraded its growth forecasts for the third quarter from 0.2 per cent to 0.3 per cent. “It looks like there has been a welcome resumption of economic growth in the third quarter, roughly offsetting the fall in the second quarter,” the research institute said, “but it is not clear how long growth will continue.

Samuel Tombs, at Pantheon Economics, said that the economy would grow by more than expected in August, with output lifted by the re-opening of car plants that shut down for annual maintenance in April instead of August.

However, business surveys suggest that manufacturers may have struggled in August under the weight of Brexit uncertainty and escalating global trade tensions. IHS Markit’s closely watched purchasing managers’ index fell from 48 in July to 47.4 last month, its lowest reading since July 2012. Any figure below 50 marks a contraction. Surveys for the construction and services sector also pointed to a slowdown. Activity in services expanded marginally to 50.6, down from 51.4 in July.

Howard Archer, chief economic adviser to the EY Item Club, said: “Survey evidence does not bode well for the economy’s performance in August, with the purchasing managers reporting deeper contraction. The CBI and British Retail Consortium pointed to subdued retail sales in August.”

However, recruitment is rising sharply as businesses “stockpile” talent before the October 31 Brexit deadline. The Manpower employment outlook index rose by two percentage points to a nine-month high of +5 per cent for the fourth quarter of the year.