UK downside risks remain very high UK downside risks remain very high UK downside risks remain very high

UK downside risks remain very high

Macro 8 minutes to read
Christopher Dembik

Head of Macroeconomic Research

Summary:  The UK is in crisis as May's Brexit deal hits a wall of opposition, the pound tanks, and the leading indicators point lower.


The wave of optimism we observed yesterday after the Brexit deal was announced was clearly premature. The warning from the Scottish prime minister was already a negative sign regarding the evolution of the situation. At the time of writing, everything indicates that PM May will lose Brexit vote due to the opposition of DUP and Conservative rebels.

The political situation is still very messy, but it seems that the backstop deal was one of the main reasons pushing two senior members of Cabinet to resign in the past hours. To win a parliamentary vote, Theresa May needs an improbable number of opposition MPs to vote for the deal, which is a colossal and probably impossible task. Based on Eurasia analysts’ forecasts, there are essentially two base scenarios for a December vote: either the government is defeated by a small margin (17 votes) or it loses by majority of 37 votes. In any case, this opens the door to more political uncertainty, a chaotic exit, a new general election, or even a second referendum. 

In this context, downside risks to UK growth remain very high, for three main reasons:

Leading indicators still point to lower growth

Most recent soft and hard data tend to confirm that the rather positive momentum that the UK has experienced over the summer was mainly weather-related. Q4 GDP is set to be weak and this trend is expected to continue over the course of next year. The UK OECD leading indicator, which is designed to anticipate turning points in the economy six to nine months ahead, fell in September for the 14th straight month. The year-on-year rate started the year at -0.6%; it now stands at -1.45% – quite a swing over nine months! The level, presently at 98.9, is the lowest since September 2012. 

In addition, the credit cycle that fueled the UK in the post-financial crisis period has completely reversed. Our in-house credit impulse indicator  which leads the real economy by nine to 12 months, is in contraction. It tracks the flow of new credit from the private sector as a percentage of GDP. Last update indicates that the trend is less negative, with credit impulse running at -1.55% of GDP versus -7.5% of GDP in the previous quarter, but it is still firmly downbeat. 

Though the correlation between credit impulse and some activity indicators is rather poor (correlation with final domestic demand is at 0.52), this sharp negative trend will surely pose some headwind to GDP growth in the medium term. We expect more negative data in 2019 but it is still too early to consider a serious risk of recession as this will depend on the deal/no-deal being confirmed and implemented.
Credit impulse
UK business investment is on a worrying path

Unsurprisingly, Brexit has had a sharp negative impact on business investment in the context of a lower flow of new credit. Looking at the disappointing path of business investment over the past quarters, we don’t see where the “underlying strength” of the UK economy that Hammond pointed out is hiding. As long as the political morass continues, business confidence and investment will only move lower, ultimately limiting the UK’s potential GDP growth and increasing the risk of a prolonged period of low growth.
UK business investment
UK household financial stress is increasing

This is well-illustrated by the flow of new personal loans and overdrafts since the referendum. As we can see in the graph below, it has been heading south, entering into contraction last spring. In our view, this is one of the most worrying trends since it is a brutal signal that the credit boom that drove the UK economy in the post-crisis years is definitively over. 
Credit impulse
Unless we see a last-minute surprise, it is hard to perceive what could change the negative medium-term trend of UK growth. This fantasy vision of absolute and unlimited sovereignty will certainly lead to one of the most striking destructions of wealth, power and confidence in a Western European country since WWII. 

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article
Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.