UK: Is Recession Looming?

The closing months of 2018 and the early months of this year have seen a sharp slowdown in economic activity in the world, particularly marked in Europe and in East Asia. This exceeded expectations and has strengthened fears of a coming recession. Yet, as was argued in the last quarterly note, these fears still seem excessive and while growth forecasts have been downgraded for 2019, a recession will hopefully be avoided both this year and next. After all, some of the clouds that darkened the financial picture last year, particularly for emerging markets, have lifted (e.g. dollar strength, higher U.S. interest rates, fears of inflation surging). And some of the Eurozone's weakness was generated by temporary effects (e.g. gilets jaunes demonstrations in France, new car emission tests or adverse weather conditions in Germany).

The danger of recession is clearly least present in the world's two largest economies. Both the U.S. and China are still growing and are expected to continue to do so. America is slowing down, but the labor market remains robust and forward looking confidence indicators do not point to a future crisis. In addition, the Federal Reserve has announced that it will refrain from further interest rate increases over the foreseeable future (indeed, hints have been dropped that rates might even be cut). As for the inversion of the yield curve (with long-term interest rates now below short-term ones), a feature often considered as a harbinger of recession, this may well reflect changes in the longer-term inflationary outlook rather than fears of a slump. Price pressures have remained very subdued for some time now, and not only in the U.S. Market participants may thus have incorporated the expectation of a structural downward shift in future inflation into their pricing of longer-term bonds.

Policy is also being relaxed in China on both the monetary and the fiscal front. The authorities have accepted that some moderate slowdown is inevitable, but will do their best to prevent year-on-year growth falling below 6 per cent. While this is a far cry from the 10 per cent growth rates that China could boast of until recently, it should be borne in mind that the absolute boost to the economy in dollar (or renminbi) terms of a 6 per cent growth rate today is of a similar order of magnitude to that of a 10 per cent growth rate in, say, 2010 or 2011. Import demand for commodities may well continue to slow down, but demand for consumer goods should remain healthy. A return to somewhat faster growth in China is likely, in turn, to strengthen the outlook in the developing countries of East and Southeast Asia. As for Japan, modest growth should continue this year, even if expansion in 2020 could be threatened by the imposition of a higher consumption tax.

Europe remains the weakest link. At the time of writing, there is still great uncertainty on the outlook for the United Kingdom. The forecast shown below assumes that Brexit will take place on amicable terms and that no significant barriers to trade will be erected on the two sides of the Channel (or in Ireland). A so-called "hard" Brexit, however, would have significant negative effects on British activity. It would also hurt Ireland and, if to a much lesser extent, several other EU economies.

On the European Continent, forward looking indicators for the manufacturing sector have been very depressed, particularly so in Germany and Italy. This is, however, not the case for similar indicators for the service sector, suggesting that the major reason for weakness lies in external demand. Export prospects should gradually improve as the Turkish and Argentinian slumps give way to some recovery in activity, as Brazil's and Russia's lacklustre recent performance improves and as China's reflationary measures raise the country's import demand. The main danger comes from Trump's protectionist tendencies. He has defined himself as "I am a Tariff Man" (4.12.2018) and his urge to tweet his "achievements" might tempt him to put into practice his oft-mentioned threat of a 25 per cent tariff on U.S. imports of cars and automotive equipment (ostensibly for reasons of national security). The direct effect of such a measure will obviously be negative, but need not be overwhelming. Simulations made by Oxford Economics suggest that it would reduce Euro Zone growth by not much more than 0.2 per cent of GDP in 2020. Indirect confidence effects, however, could worsen this picture.

Domestic trends, so far at least, have remained relatively robust. The labor market, in particular, is still performing well, with unemployment declining in a number of countries. Nominal wage growth is also relatively rapid, without this spilling over into inflation. Real wages, therefore, are expanding at a healthy pace and so is retail spending. In addition, policy is very accommodating. The latest signals from the European Central Bank (ECB) suggest that negative short-term interest rates will prevail through 2019-20. And fiscal policy is also moderately expansionary almost everywhere in Europe.

The danger, of course, is that unfavorable developments on the external front could spill over into domestic trends leading both households and corporations into more prudent behavior. A simultaneous slowdown in both external and internal demand could then usher in, if not a fully-blown recession, at least a period of stagnation. Policy would, almost certainly, be unable to counter this in an effective way. The ECB is highly unlikely to cut interest rates into further negative territory and a resumption of its Quantitative Easing program may well hit diminishing returns. On the fiscal front a return to austerity is out of the question, but there are clear limits to any further expansionary moves. In some countries this is because of the size of public debt; in others, particularly Germany, it reflects policy preferences for budget surpluses.

Spain and Ireland remain the strongest performers in the Eurozone, spurred by reductions in private debt and by structural reforms. Germany and France are likely to record modest growth, broadly in line with their potential. Italy may well stagnate this year and only grow marginally in 2020. Political uncertainties have weighed on activity, bank lending to the corporate sector is declining, partly reflecting the high burden of non-performing loans, and confidence indicators have plunged. Given very low, or even non-existent, growth and the likelihood of rising public debt, future turbulence on financial markets cannot be ruled out.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions