U. K. Moves Into Recession Territory

by: John M. Mason
Summary

The news is out, the United Kingdom experienced negative growth in the second quarter of 2019.

It seems as if the economic uncertainty surrounding the possibility that the U. K. will leave the European Union with no deal on October 31, or soon thereafter, is growing.

The economic consequences of a no deal Brexit are really starting to be realized in what the British are now experiencing.

Yesterday, the headlines read “Germany Moves into Recession Territory.”

So under similar conditions, it seems appropriate to write “U.K. Moves into Recession Territory.”

The official gauge of a recession is for real GDP to decline two consecutive quarters. It would seem appropriate to say that if a country has one quarter of GDP decline that it was in “recession territory.”

Well, it is official now, The U. K. economy is in “recession territory.”

My report from yesterday was that it seems as if Germany is at that point as well.

“The U. K. economy contracted in the second quarter for the first time in almost seven years amid unwinding of stockpiling activity, rising Brexit uncertainties and weakening global growth.”

Annualized, the quarter-over-quarter downturn came out to be 0.8 percent. This is down from the annualized performance of the first quarter in which the economy grew at an annualized 2.0 percent.

But, the two quarters seem to be tied together.

Growth received what has proved to be a temporary boost in the firs three months of the year as businesses built up stocks of products whose supply might have been interrupted by Brexit, which was at that point scheduled to take place on March 29.”

“But now Brexit is postponed until October 31 at the earliest, businesses drew down on their stocks in the second qurter rather than place new orders, leading to the largest fall in manufacturing output since the depths of the global financial crisis in early 2009, and to a sharp fall in imports.”

Brexit is real and it is having effects. The Bank of England, for example, has forecast that the uncertainty caused by the threat of Brexit has caused long-term damage to labor productivity.

Behind this is a decline in business investment, which has fallen five of the past six quarters. In fact, the current level of business investment is back near the level of when the Brexit vote was held in 2016.

In a world where uncertainty seems to be ruling, the whole affair surrounding Brexit is making its contribution to the “mess.”

And, uncertainty, certainly, does not appear to shrinking.

There is little confidence that either monetary or fiscal policy can stem a decline coming from theses sources.

This is a supply side problem…not, a demand side problem.

The problem is one that businesses have pulled back and are likely to continue to do so until the outcome of the whole Brexit thing works itself out.

Readers know that I am no fan of Brexit. The whole referendum was ill-thought out from the start as it was a political vehicle that Prime Minister David Cameron thought would bring him enhanced power to gain greater control of the government.

Cameron badly mismanaged the whole affair and then resigned when he lost.

There were no plans for a Brexit because few, if any, people thought that the “leavers” would walk off with the victory.

The subsequent scene in the government’s dealing with the whole Brexit issue would have been a good laugh as a Monty Python skit, if the whole thing were not so ominous.

Unfortunately, I can’t see a good outcome for the British economy in the face of a no-deal Brexit.

The only possible positive outcome of this whole affair, to me, would be another referendum that would result in a “remain” vote where the U. K. would stay in the European Union.

Otherwise……..

Well, the value of the British pound tells the story. It now takes only about $1.2060 to buy one pound these days, and you can expect this will price will go lower as the full reality of a Brexit is absorbed as we near an October 31 “leave.”

As for the British economy. I don’t think that you have seen the worst yet.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.