14 October 2021

Could we worry ourselves back into recession?


Confidence in the UK economy has tumbled in the last few weeks, driven by fears of a cost of living crisis, reports of empty shelves, fuel shortages, rising taxes, interest rate hikes, and even a Christmas deprived of turkey or presents. The panic at the pumps shows that these fears can sometimes be self-fulfilling. It is therefore time for a reality check.

Let’s start with the national mood. The latest survey data on consumer and business confidence are not as dire as many reports suggest.

For example, the YouGov/CEBR index of consumer confidence fell further in September, but only to its lowest level since April, which was still relatively high. This survey did include a sharp deterioration in household expectations for their finances over the next 12 months, which is worrying. But this component is usually in negative territory, and the latest readings are not far from the past norm.

It is a similar story for business confidence. The Institute of Directors (IoD) made a splash with the relaunch of their Economic Confidence Index, which reportedly ‘fell off a cliff’ in September. But again, this index was still at a historically high level.

It is also important to distinguish between the responses to general questions about the health of the economy, and those which ask about specific factors, such as an individual’s perceptions of their own job security, or a business’s plans for investment and hiring.

The former tend to mirror the latest media headlines and are the least useful when it comes to predicting real behaviour. As Reuters’ Andy Bruce reminded me recently, UK consumers were the most pessimistic about economic prospects out of any EU country for a long time after the Brexit vote, according to the European Commission survey. But this was not reflected in the actual performance of the UK economy which, while not great, was certainly not doomsday stuff.

The responses to the specific questions are usually more informative – and they are now mostly reassuring. For example, even the IoD survey showed that significantly more companies expect a rise rather than a fall in their revenues, investment, and employee numbers over the next 12 months (although this also applies to their costs).

This is consistent with the latest Purchasing Managers Surveys, published by Markit, which suggest that growth in economic activity is stabilising at a slower but still decent pace, and that expectations for future output are still upbeat, notably in the UK.

Similarly, Morning Consult’s Index of Consumer Sentiment (ICS) has fallen sharply, but this has been led by deteriorating views about the future health of ‘business’ in general. rather than any immediate concerns about household finances.

That is backed by the latest labour market data. The UK economy is continuing to create jobs at a rapid pace, with the number of payroll jobs increasing by another 207,000 in September. The ONS also estimates that the underlying rate for regular pay has picked up to between 4.1% and 5.6%, which should at least keep pace with price inflation over the winter.

This week’s GDP data were reassuring, too. Monthly growth of 0.4% in August may not sound like much but, when combined with revisions to previous data, it means that GDP was only 0.8% below where it was in February 2020. Output therefore remains on track to return to its pre-Covid level in the Autumn, which would be much sooner than most had anticipated at the start of the year.

This, in turn, should help to repair the public finances without the need for any further tax increases (which would be counter-productive anyway). And while it is increasingly hard to argue that the Bank of England needs to keep interest rates at the current emergency low of just 0.1%, a small increase would be another sign that the economy is recovering.

In short, things are not as grim as they may first appear. Without seeking to blame the messenger for genuinely bad news, it does seem that many commentators have a negative bias, including business lobbies seeking additional support from the taxpayer. Indeed, if people and businesses were really as worried about the economy as some suggest, the Conservatives surely wouldn’t be so far ahead in the polls.

In the meantime, the pumps seem to be full of petrol again. Wholesale energy prices have levelled out. Supply disruptions are beginning to ease as markets adapt. While this will still be a difficult winter for many, there is no need to cancel plans for Christmas just yet.

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Julian Jessop is an independent economist.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.