Let’s Not Talk Ourselves into a Slump!

By Dominic Bourquin, Head of the Tax Consultancy and Corporate Finance team at Monahans

In the face of the latest Office for National Statistics (ONS) Quarterly Gross Domestic Product (GDP) figures, it is important for businesses in the UK to stay calm and not panic otherwise there is a real chance we could talk ourselves into a recession.

The ONS GDP figures are seen as a key barometer of the strength of our economy. On August 12, the ONS announced a 0.1% estimated decrease in GDP for the quarter ended June 2022.

In my opinion, this can be interpreted in a number of ways. Some might say this is a precursor to a recession later in the year, others might argue that such a small estimated fall in GDP might actually be a rounding and, of course, it is subject to revision later as more data becomes available.

There is a real mixed bag behind the figures.  The service sector, the largest sector of the UK economy, has shrunk by 0.4% in the quarter, mainly due to the fall in what is termed health and social work activities – this has been caused by a reduction in coronavirus led activities as the COVID-19 virus has become part of normal life and COVID testing, vaccinations and track and trace activities have reduced.

That said, this fall does hide some bright spots, such as the increase in the wholesale and retail of cars and increases in accommodation and food services partly due to Jubilee related activity.

Of course, all data comparisons are dependent on what is being compared, so, to be too gloomy about the shrinking of the service sector, because we are undertaking less coronavirus related health activity, seems to me like an overreaction – surely the economy recovering from coronavirus so there is less of that sort of activity is a good thing?

In the production sectors, there was an overall increase of 0.5% driven principally by increases in gas and electric power generation and transmission, although mining and quarrying activity was down, but not by much, so the part of the economy that actually produces tangible products has done pretty well, with any falls in sectors within the wider production figures being pretty negligible.

The construction sector performance is usually an early indicator of things to come in the economy and is notoriously cyclical so the rise of 2.3% does not yet signal that a recession is coming.

Expenditure and private spending showed small falls of 0.1% and 0.2%, but again, with these first figures being estimated and subject to revision, there is no reason to panic yet.

I am pretty sure that back in 2010 when George Osborne was Chancellor that we “were in recession” and yet when the figures were revised some months later as more data became available, there had not actually been a recession at all! 0.1% given the size of the UK economy is tiny!

Overall, I am sure the Government and all of us would have much rather seen an increase in GDP, but when the reasons for the fall are examined and we remind ourselves that these are early estimates subject to revision, there is no need to panic yet – they might be indicators of the start of a trend that leads us to a recession, but then again they might not!

The fall in the service sector was caused by a drop off in coronavirus related health activity, which you would expect as the virus recedes, so let’s not talk ourselves into a slump!