Cantillon: UK economy slips towards recession

The extent of the now seemingly inevitable slowdown in the UK economy will depend on consumers.

Consumption, loosely defined as the value of goods and services bought by people, is the largest component of gross domestic product (GDP) and therefore the key determiner of growth.

Generally speaking, when consumers stop spending, things could go bad – and quickly.

Investment, the other big component of GDP, had already begun to wobble before the vote, with firms cancelling or withholding investment amid the uncertainty.

"The quickest way for non-financial corporations, especially in the manufacturing industry, to react to heightened uncertainty is cut production and meet demand by destocking until the situation gets clearer," Barclays Bank said in a note to clients.

The bank says the UK may already be in recession, defined as back-to-back quarters of negative growth. Barclay’s economists are now forecasting third- quarter growth of -0.2 per cent, followed by -0.3 per cent in the fourth quarter; and -0.4 per cent in the first quarter of 2017.

The bank also warns that the improved net exports contribution flowing from a weaker sterling will only partially offset this drag from investment and consumption.

The depth of the recession, once the initial shock dissipates, will also depend on responses from the government and central bank.

The Bank of England, whose monetary policy committee meets on Thursday, has already warned it will act to ward off the coming storm by implementing a programme of quantitative easing and rate cuts.

UK rates are historically low at 0.5 per cent, though that is high compared with other developed economies.

Markets are already predicting a 0.25 per cent rate cut by the bank as early as this week, which will make it easier for firms to borrow and invest.

The incoming Conservative leadership, under the stewardship of Theresa May, may also opt for a fiscal stimulus to boost productivity and stimulate growth especially with chancellor George Osborne abandoning his 2020 fiscal targets.

Whether they can achieve this and retain the confidence of the markets is the question.