- Credit Suisse predicts a one-third chance of recession in the next six months.
- That has actually fallen from 38% in July, but remains close to its highest level since 2009.
- Sliding PMIs in the services sector are leading recession indicator, bank argues.
LONDON — There is a one in three chance of a UK recession within six months, according to Swiss banking giant Credit Suisse.
The bank argues in a paper released on Monday 23 October, two days before the UK’s better than expected GDP data, that the weak trend in services PMIs in the year and a half since the referendum point to further sluggish overall growth for the UK economy.
“Service sector PMIs lead UK GDP growth, and are now consistent with growth slowing toward 1%,” UBS’ UK economics team, led by Andrew Garthwaite write.
Growth slowing towards 1% is the bank’s central case, but a recession is also a potential.
“Our economists, using a probit regression model, estimate that there is a 33% probability of a UK recession on a six-month view — close to the highest reading since 2009,” the bank writes. “Their model uses the real policy rate, real oil prices, the OECD leading indicator, inflation, the unemployment rate, real equity prices, real house price inflation and real credit growth as inputs.”
Here is the chart from Credit Suisse’s team:
A technical recession occurs when an economy contracts for two consecutive quarters. If the UK’s GDP were to shrink 0.1% in both the third and fourth quarters of 2017 that would be considered a technical recession.
However, in the hypothetical (and highly unlikely) scenario that the economy shrunk by 1.1% in Q4, grew 0.1% in Q1 of 2018, and then contracted a further 1% in Q2 of 2018, that would not strictly count as a technical recession.
Credit Suisse’s recession probability is now a little lower than it was in July when the bank’s models assigned a 38% chance of the UK economy contracting for two straight quarters.
In its note this week, Credit Suisse said Brexit has had a negative impact on growth and the UK’s position in global growth standings.
The pound has slumped, inflation has shot upwards (hitting its highest level in over five years last month), real wage growth has stagnated, and GDP growth has slowed significantly.
All of these negatives, if not solely caused by the vote to leave the EU, have certainly been exacerbated by Britain’s impending exit from the bloc, the bank argues.
As Garthwaite and team write, over the coming years the UK will experience “a growth rate which is clearly underwhelming relative to that elsewhere, and relative to the growth of the last five years (which has averaged 2.1%).”
Essentially, the economy will be much worse off in several years time than it would have been had Britain voted to remain in the UK, and will increasingly fall behind the competition — namely major eurozone economies like Germany, France, and Italy.