Ten things to look out for if UK is heading for economic recession | Larry Elliott | Business

Recessions are always easy to spot in retrospect. With the benefit of hindsight, it is always easy to identify the warning signs of serious trouble ahead.

Correctly forecasting recessions in advance demands a higher level of skill, as the Bank of England found in 2008 when it mistook the biggest slump since the second world war for a temporary growth slowdown.

The UK suffered recessions in the mid-1970s, the early 1980s, the early 1990s and the late 2000s. On average, that means one every 10 years, and it is now a decade since the last one. So what could go wrong this time? Here are 10 things to look out for.

shoppers and homeless person

Anecdotal evidence points to poor Christmas sales on the high street. Photograph: Niklas Halle’n/AFP/Getty Images

A bad Christmas for retailers
Unemployment is at its lowest since the mid-70s and wages are rising faster than prices again. Both these factors should support spending in the shops and online, but early anecdotal evidence suggests consumers are keeping tight control over their spending. Households ran down their savings to finance spending when their real incomes were being squeezed by higher inflation. They may now be deciding to save more and spend less.

The housing market
Every measure of the residential property market is telling the same story. Fewer homes are changing hands and prices are heading south. In part, that’s because prices were too high for first-time buyers, even at ultra-low interest rates, making a correction inevitable. But along with weak new car sales, it also reflects wariness about purchasing big-ticket items.

Crashing share prices
Stock markets tend to anticipate events, falling months ahead of a recession and rising before the downturn is over. By that measure, 2019 is going to be a grim year because equity prices have been falling for months. The FTSE 100 has been trading at its lowest level in more than two years, and shares on Wall Street were on course for their worst December since 1931, when the US was mired in the Great Depression.

Rising interest rates
The official cost of borrowing hit a trough of 0.25% after the EU referendum and now stand at 0.75%. The Bank of England says low unemployment is leading to faster earnings growth and has signalled its intention to keep withdrawing the stimulus provided during the recession of a decade ago. It also says further rate rises will be limited and gradual.

The Bank runs out of ammo
Threadneedle Street traditionally responds to a struggling economy with deep cuts in interest rates. In 2008-09, for example, official borrowing costs came down from 5% to 0.5% in a matter of months. Were the economy to weaken significantly in 2019, the Bank would have only limited scope to reduce interest rates and would instead have to rely on the bond-buying process known as quantitative easing. On past form, this would only be of limited effectiveness.

Xi Jinping and  Donald Trump

All eyes are on Xi Jinping and Donald Trump. Is it trade war or peace? Photograph: Fred Dufour/AFP/Getty Images

A trade war
The peace brokered between the US and China at the recent G20 summit is fragile. Washington is angry with Beijing over allegations of cyber-espionage and theft of US property rights, and the threat of an increase in protectionist measures is real. A full-scale trade war between the world’s two biggest economies would have knock-on effects on other countries, including the UK.

A eurozone crisis
The economies of two of the three biggest countries in the eurozone, Germany and Italy, contracted in the third quarter of 2018 as the waning impact of stimulus from the European Central Bank meshed with weaker global demand for manufactured goods. After a period of above-trend growth, the eurozone will, at best, grow only modestly in 2019.

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Theresa May’s uphill struggle to get her Brexit withdrawal bill through parliament has highlighted the gridlock at Westminster. Without the support of the DUP, the Conservatives will struggle to get legislation passed, but Labour would face the same problem if it formed a minority government. Political uncertainty is traditionally bad for the economy.

Mothballed investment
Capital spending by business is volatile. It tends to rise strongly when the economy is doing well and fall heavily when times are bad. Business investment declined in each of the first three quarters of 2018, which is highly unusual for the late stages of an economic cycle. Companies have waited for clarity about Britain’s departure from the EU before committing to major projects.

Last but certainly not least, the fate of the economy in 2019 will be determined by how – or perhaps whether – the UK departs from the EU on March 2019. The Bank of England has already outlined a bleak worst-case scenario in which a chaotic departure plunges the economy into a bigger recession than that of 2008-09. Other outcomes would be far less dramatic and the chancellor, Philip Hammond, believes exit on the PM’s terms would lead to a Brexit bounce.

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