Why GDP is down – and why it doesn’t necessarily mean recession

News that Britain’s GDP fell 0.1% in August from the previous month is being reported on to suggest that recession may be on the way.

At Continuum, we believe that things may not be as dark as they appear.

It is true that the latest statistics from the Office for National Statistics (ONS) show the economy contracting – but a look at what is really going on can calm those recession worries.

So, what is really going on?

GDP – Gross Domestic Product – indicates the health of the UK economy. It measures the value of goods and services produced and is usually expressed as a percentage change over a three-month period – although monthly figures are favoured by those who need their finger on the economic pulse.

When the GDP is up on the previous three months, the economy has grown, and more wealth is generated. If it is down, the economy is shrinking – and two consecutive three-month periods of shrinkage is the technical definition of a recession.

The last set of figures, for the second quarter of 2019, looked negative, shrinking by 0.2% – which might make the fall in August a portent of a negative third quarter.

But although the economy certainly contracted in August, the ONS has revised its July figures from 0.3% to 0.4%. The initial estimates are almost always revised as information comes in. It looks as though the service sector is actually growing. The sector – which makes up roughly 80% of GDP – grew by 0.4%, following largely flat performance in the previous quarter.

Although there are some worrying ups and downs – we may not actually be looking at an overall contraction in the UK economy at all.

There is volatility, from slower global growth and Brexit uncertainty. The stockpiling that meant increased economic activity in the early part of the year has unwound, as businesses use the stock they have amassed. Some manufacturers such as car manufacturers may be taking production down a gear as buyers hold off, and high street retailers continue to lose custom to the internet. But on the positive side, wages are growing, employment remains at a record high and many observers see the UK growing faster than Germany and Italy.The low value of the Pound on foreign markets is actually supporting an export boom.

The classic triggers of a recession seem to be absent.

What happens next?

One of the answers of what happens next is, of course, Brexit. Even though a deal was struck with the EU on Thursday, predictions for the outcome of the Commons vote on Saturday are still uncertain.

The outcome of the Brexit decision will provide some clarity for businesses as they may know how and where they can trade.

Consumer confidence will be influenced as a result.

Of course, Brexit is not the only issue. Political upheavals and President Trump’s trade wars have put the handbrake on global trade and growth. The World Bank, the OECD and most private sector economists have cut their forecasts – but the fact that problems are recognised makes it likely that steps will be taken to ease them. Central banks around the world have already begun to cut interest rates and many are restarting stimulus to reverse the slowdown.

What should you do?

You can’t afford uncertainty with your own money, which is why you need an expert on your side. At Continuum, our expertise, service like our free guide to tax efficient investment, our weekly education mailer providing you with easy to understand, educational topics across a wide range of financial areas, our Personal Finance Portal and above all personal support from your Continuum adviser can help you create a wealth management strategy.

It means we can help you protect and grow your wealth, whatever the economic outlook and avoid your own personal recession. Simply call us now.

The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.

The value of investments can fall as well as rise and you may get back less than you invested.

References:

https://inews.co.uk/news/business/uk-recession-fears-latest-brexit-uncertainty-decline-ons-638841

https://www.ft.com/content/7e412720-ec3a-11e9-85f4-d00e5018f061