In the immediate aftermath of Britain’s vote to leave the European Union, things looked very troubling for the British economy.
Many predicted a coming recession, with several banks and economic research houses arguing we’d see the first recession in the UK since the end of the financial crisis.
Even one of Britain’s most prominent hedge fund managers, who actually backed Brexit, says we are destined for a recession.
However, in the four and a bit months since the referendum result, Britain’s economy has held up far better than expected, the economy grew 0.5% in Q3 — well above forecasts — and the manufacturing sector is holding up well.
Almost all major banks have now cancelled their recession predictions, but one remains — Barclays.
Barclays has consistently been one of the most pessimistic big financial institutions about the post-Brexit economy, and it is sticking staunchly to its guns.
Writing in a note circulated to clients on October 28, Barclays analysts Fabrice Montagne and Andrezj Szczepaniak continue to argue for what they call a “slow-fuse” recession — whereby the UK endures a prolonged but reasonably shallow contraction.
The big indicator for this recession right now, the pair suggest, is the fact that both business confidence and consumer confidence are tumbling, something that has traditionally signalled recession for the UK.
Here is the chart:
The pair note in a series of bullet points:
- “The UK economy has fallen into recession each time business and consumer confidence markedly fell below their long term average together (1975/76, 1979/82, 1990/92, 2008/09).”
- “In 1998/99 and 2001/02, the UK staved off economic contraction despite deterioration in business confidence as consumer confidence held up. With private consumption accounting for approximately 65% of UK GDP, the household sector is the key driver of UK GDP.”
- “Given our forecast of a shallow, prolonged recession, confidence surveys needn’t reach historic lows: a period of below average confidence is likely to suffice, with firms bearing the brunt of the adjustment in the immediate instance, and households to gradually follow by end-2017.”
Barclays may be pretty much the only major organisation left that thinks a recession is definitely coming, but if its predictions are right, prepare for pain.