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Industrial exports are the engine of developed economies

12-08-2019

Downing Street must add the likelihood of a UK recession to its list of possible scenarios after official figures showed that the economy contracted in the second quarter by 0.2%.

The prospect of a further decline in GDP in the third quarter, which would make a recession official and might be clearly on the cards before the 31 October Brexit deadline, should dominate the prime minister’s deliberations.

All areas of the economy shrank except the services sector, which managed to inch ahead by 0.1% in the three months to the end of June.

There are those inside No 10 who dismiss the figures as merely the result of Theresa May’s failure to push her withdrawal deal over the line in March.

They murmur privately that the aftermath of this debacle was likely to provoke economic volatility as companies and consumers reacted first to parliament’s refusal to back a deal and then the uncertainties created by the Tory leadership elections and the perceived intransigence of European Union leaders.

And casting an eye over the past year rather than the past few months alone suggests there is something to the argument that the economy is stronger than it looks.

GDP increased by 1.2% in the 12 months to the end of June, and is still on schedule to grow by at least 1% over 2019 according to most forecasters. Compare that figure with the annual growth rate predicted for Germany of just 0.5% and 0.1% in Italy.

Yet to dismiss the deteriorating economic situation as a symptom of Brexit uncertainty – one that will be fixed automatically once the dark cloud of Brussels’s influence has been lifted – is to ignore some unsettling economic trends.

Donald Trump’s tariff wars have provoked slowdowns in output across China and the far east. Concerns that a slump in trade will lead to a global recession have heightened and spurred central banks across the world to cut interest rates at the end of last month.

The UK’s GDP figures show that in 2017, when a smooth exit from the EU was in prospect, businesses increased investment in capital goods by 3.5%. In 2018 that figure had slumped to 0.2%. In the last quarter, firms cut spending, which led to a 0.4% decline on the previous three months.

It’s possible that industrial firms could emerge, phoenix-like, from the ashes of 31 October to invest again. But unfortunately, their longer-term position has become steadily weaker.

UK companies have been borrowing heavily since the 2008 crash. Most of the funds have been used to pay generous dividends, rather than being ploughed into new equipment or research and development.

According to analysis of industrial companies by US risk assessment company Credit Benchmark, British firms have allowed their financial situation to deteriorate to such an extent that they are much more vulnerable to a shock than their peers in Europe or the US.

Credit Benchmark’s risk indicator shows that EU companies, acting prudently to shore up their finances, have cut their borrowing since 2016 to the extent that their credit risk has improved by 10%. Over the same period, UK industrial companies have allowed their credit risk to deteriorate by 25%.

This trend cannot be said to provide a springboard for growth. Maybe Britain can prosper without an industrial base, just as the small group of economists that support Brexit believe. Few others would agree. Industrial exports remain the bedrock of developed economies. And for that reason a recession in the autumn should be taken seriously as an indication of the UK’s underlying weakness.

Source: The Guardian