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+++28 December: Mood as well as current conditions take a turn for the worse in wary anticipation of new year+++
Not only that the UK economy has fallen back from its late summer highs: It has been doing so in even accelerated fashion right towards Christmas. After chalking up some 0.6 per cent growth of GDP in the third quarter, almost each and every leading indicator such as consumer and business confidence respectively as well as many current state indicators like employment and output in the services sector have been going into reverse. Small wonder: By deferring another crucial decision on Brexit yet again, the government has delivered the straw that broke the camel’s back. For many firms, December was their last month to stave off implementing their Brexit contingency plans, scheduling freezes of investment (which indeed has been shrinking over the past months already) and cutbacks on hiring for the first quarter of the new year. Hence, even if Brexit should be resolved in a calm and orderly way, the signs for the economic start into the New Year are inauspicious, for that development would quite simply come too late for business to act upon. Our UKES mirrors the situation exactly: While the expectations component has dived through both the state and main indicator lines as well as below zero, the state component has taken a severe hit, too. That leaves the main indicator as much as its two sub-indicators on their respectively lowest levels since the Brexit referendum in June 2016, with current trading conditions in decidedly worse shape than two and a half years ago. The Brexit slump is here for everybody to see now; and only that quandary’s solution is going to tell whether the economic downturn will be reversed – or become even worse.
Sources: UK Parliament, Bloomberg
Our UKES is an indicator of the condition of the UK economy which, otherwise, does not exist in this comprehensive form. It consists of two components and the main index.
The component “expectations” runs ahead of the current situation, comprising elements such as development of inflation and interest rates, consumer- and business confidence, etc. The “state” component describes the current situation and comprises data such as industrial production, net trade, etc. The main index, then, is a smoothed combination of the two components.
The UKES describes the development of the British economy in the recent past rather precisely; particularly the expectations component has emerged as a valid tool for prognosis. It is calculated to scale so that a positive reading of the state component as well as the main index signals current economic expansion. Furthermore, the UKES generates these other signals:
If the expectations graph rises through that of the state component, that is a valid signal for an economic upturn in the near future (3-6 months) and vice versa for a break-down through the state graph. If the state component, additionally, plots over the main index, that signals a healthy and stable economic expansion; when it plots beneath the main index, the current economic upturn has not yet solidified or the recession is persistent, respectively.
GDP growth (Q4/18)
Services PMI (Jan.)
Unemployment rate (Dec.)
Individual country ranges according to historic max-/min levels
Sources: US Bureau of Economic Analysis, US Bureau of Labor Statistics, US Census, Australian Bureau of Statistics, Instituto Brasileiro de Geografia e Estatistica, Customs General Administration of China, bloomberg, Institut national de la statistique et des études économiques (INSEE), UK Office of National Statistics (ONS), Trading Economics