Head of Macro Analysis, Saxo Bank Group
Summary: There has been a handful of good data released in the United Kingdom in recent weeks but it would be misleading to see this as a sign that growth is on the verge of a prolonged rebound.
We identify a bunch of risks that could derail growth in coming quarters:
- The likelihood of no-deal Brexit at the end of October 2019.
- Deterioration in the trade war front that could impact more negatively the global supply chain.
- The lack of money supply growth in main economies is leading to low growth until at least mid-end of 2020.
- The risk of recession in the US has significantly increased for 2020. Based on leading indicators, the probability is now comparable to the probability measure in advance of the last 3 recessions.
- Rising tensions between the United States and Iran in the oil-strategic routes of the Strait of Hormuz that could lead to disruptions in the global oil market.
Our leading indicator, the credit impulse, is tracking the flow of new credit in the economy and explains economic activity nine to twelve months forward with an “R2” of .60. As of now, UK credit impulse has been in contraction for seven consecutive quarters and is currently running at minus 4.4% of GDP. The length of the contraction is similar to that of the GFC but with a smaller amplitude. The lowest point reached in the post-referendum area was minus 7.4% of GDP versus a drop up to minus 20% of GDP in 2009.
In the chart below, we have plotted the evolution of the flow of new personal loans and overdrafts since 2002 as a proxy of UK household financial stress. It has been in contraction since April 2018 and is currently back to where it was in 2011, at minus 1.8% of GDP.
On the top of that, the risk of policy error has significantly increased. In 2010, the credit cycle has rebounded very fast and strongly after recession due to the Bank of England lowering interest rates and the massive injections of liquidity in the financial system. In post-Brexit UK, such a stimulus is unlikely. The BoE has lately sent very mixed messages about the next move of monetary policy, pointing out risks to growth at its latest Monetary Policy Committee meeting but also expressing concerns about household inflation expectations that keep increasing above 3% up to 5 years.
Though it is getting more or more likely that the next move will be an interest cut rather than a hike, the UK central bank has less room than the Fed and the European Central Bank to stimulate growth in a context of high inflation expectations. This monetary policy dilemma makes a move in terms of fiscal policy even more urgent than before to mitigate the Brexit impact.
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