The UK economy will shrink for the first time in years this summer – and the uncertainty won’t stop there

It looks at least an even chance that the UK economy will have shrunk in the second quarter of this year. If it does, that will be the first negative quarter since 2012. Of course, the data isn't available until early August – so it is far too early to be sure. But a survey of economists by Bloomberg suggested that the economy will have contracted by 0.1 per cent. Not terrible, but not great either. How worried should we be?

I think the first thing to be clear about is that Brexit is only a marginal element in all this, though I am afraid both sides of that debate will cite the economic slowdown as support to their cause.

Leavers will say that this is the result of our failure to leave the EU, while Remainers will say that, at last, the negative impact of the decision to leave is showing through. Both views are naive. Brexit may have slightly boosted first-quarter growth as some companies stockpiled goods, and that will have unwound. The continuing uncertainty may also have delayed some investment decisions. It would be odd if it hadn’t. But it also looks as through the German economy may too, have contracted during the second quarter, suggesting that the slowdown is much more widespread.

TS Lombard, the London-based research group, thinks so. In a note just published, its chief economist Charles Dumas writes:

“The root cause of Germany’s slowdown into virtual recession is the trade-war-driven problems of China and other non-oil emerging markets, given Germany’s excessive dependence on exports for growth.”

The structural problems of Germany are different from those of the UK: its excessive dependence on exports is the mirror of the UK’s over-dependence on domestic demand. But a global slowdown eventually hits everyone. In our super-connected world economy, no country is an island.

So what should we look for? Start with UK domestic data. The most-scrutinised forward-looking indicators are the purchasing manager indices and the latest ones are weak: services just above the 50 per cent point that distinguishes between expansion and contraction, and manufacturing and construction below it. But if you want real data rather than surveys – what is actually happening as opposed to what businesses think will happen – the two things here to look at are employment and tax revenues.

The next set of labour market data come out on Tuesday 18 July. The last lot were fine: in May unemployment was still down at 3.8 per cent, the lowest since 1974, and employment the highest ever and still rising. But the June numbers may show that labour demand is tailing off.

We get tax revenues for June the day after, Wednesday 19 July. Again, the previous month was fine. Borrowing was up a bit on 2018 but that was because of higher spending, not falling taxes. The three biggest taxes, income tax, national insurance contributions and VAT, were all solidly up. But again, let’s see what happens. Any weakness on any of those would suggest that the pause is indeed for real.

And beyond? This will be a summer of extreme uncertainty and that is never good for economic activity. I don’t think there is anything much that can be said that will resolve this uncertainty. But we do know that under previous similar periods, consumers tend to focus on short-term spending, rather than make big-ticket purchases. So expect car sales to remain weak, but food and other consumables reasonably strong. Wages are running over 3 per cent up on a year earlier, so on paper, at least, real incomes are rising. Overall, then, expect a modest rise in consumption and a continuing shift to online purchasing.

Remember the government, whoever is running it, will ease fiscal policy this autumn, and that will give at least a short-lived boost to the economy. Of course, the thing that would really flip demand up (or down) will be an end to (or an escalation of) global trade tensions. But we have to assume they will rumble on much as now.

Conclusion: expect the summer pause to be real, but also expect a scruffy recovery in the autumn. Eventually, there will be a more troubling global slowdown but I don’t think we are there yet.