UK edges towards recession

The UK is slipping towards outright recession. The first quarter GDP numbers had the UK growing at just 0.3 percent, which is a little over one percent at an annualized rate. Growth is down sharply and and if the deceleration continues, the economy will probably begin to shrink during the second half of this year.

Declining investment expenditure is the major reason behind the slowdown. The chart below breaks down the 0.3 percent q1 growth rate into its component parts; consumption, investment, government expenditure and net exports. The components made positive contributions to growth; consumption, government expenditure and net exports. However, declining investment knocked off 1.2 percentage points off GDP growth.

The investment decline was largely due to a firms reducing their inventories. Companies are bracing themselves for a slowdown and they are busy selling off unwanted stocks. It is a dangerous thing to go into a recession with a warehouse full of unwanted stock.

So far, the household sector has kept spending. However, the combined effects of higher prices and negative real wage wage growth forced consumers to reduce their savings, and where possible to build up credit card balances.

Deferring savings and accumulating debt can only delay the inevitable slowdown in consumption. Once the household sector capitulates and reduces consumption, the UK will slide into negative growth. The second quarter is going to be tough.