The yield curve has been a reliable predictor of US recessions over the last four decades, less so in the UK. With only one exception, each time the yield curve has inverted, the US economy has entered a downturn within 18 months.
What is the yield curve?
The yield curve is the difference between the interest rate on a longer-dated bond (debt issued by a corporation or country) and a shorter-dated bond.
For instance, typically it should cost less to borrow money for two years than for 10 years. This is because the economy is expected to grow over time and experience inflation. A healthy yield curve should therefore slope upwards.
What happens when it doesn’t?
When it costs more to borrow money in the short term than it does in the long term, the yield curve inverts or slopes downwards.
At best, an inversion suggests that investors expect the economy to slow, at worst it signals a recession could be on the way.
Why does the yield curve matter?
Keith Wade, Chief Economist said: “The curve is moving around at the moment, but we are close to if not inverted in both the US and UK.
“The US curve is a reliable indicator of recession, the UK curve less so.
“Nonetheless, if the US goes into recession it is hard for others not to go the same way given its importance as a driver of the world economy. So the double signal is important.
“There is normally a lag of about one year from inversion to recession so the curves are signalling problems for 2020.
“That said the UK has enough troubles in the near term having already experienced one quarter of contraction in the economy in Q2 2019 and facing the prospect of a hard Brexit in Q4 2019.
“The yield curve is saying that any post Brexit bounce in growth is likely to be short lived in the UK – food for thought for the government’s general election strategy and the Bank of England which continues to hint at raising rates.”
The chart below shows the difference between 2 and 10 year government bond yields in the US and UK which creates the yield curve. The figures shown are as at the end of the day. The UK yield curve inverted during the day on 14 August 2019.
Britons’ wages grew faster than at any time since the financial crisis in the three months to June, official figures showed today, despite the UK economy shrinking over the same period.
Meanwhile, the number of UK workers without a job rose slightly in the three months to June, although it stayed close to record lows, the Office for National Statistics (ONS) said.
The figures are the latest sign that the UK jobs market remains robust despite an economy stalling under the weight of Brexit and a global slowdown. Official figures last week showed British GDP shrank by 0.2 per cent in the second quarter of the year.
Wage growth reached an annual rate of 3.9 per cent in the second quarter of the year, higher than the 3.6 per cent growth in May. It also beat economists’ expectations of a 3.8 per cent rise.
The rise means real wages – with inflation taken into account – climbed at an annual rate 1.9 per cent in the second quarter excluding bonuses.
Yet unemployment rose slightly to 3.9 per cent of the working age population between April and June, figures from the Office for National Statistics (ONS) showed.
The score was above the 3.8 per cent seen in May and above predictions of the same figure again. It was lower than the four per cent unemployment rate of a year earlier, however.
Work and pensions secretary Amber Rudd said: “Households across the UK are earning a regular income, and millions more receiving a pay boost thanks to wages rising at their fastest in a decade – outstripping inflation for a 17th month in a row.”
“Our workforce increasingly reflects our vibrant society, with a record number of women in employment while the number out of work falls to an all-time low.”
She said young people were “entering a workforce that is flourishing and full of opportunity”.
ONS deputy head of labour market statistics Matt Hughes said that although “employment continues to increase” the “number of vacancies has been falling for six months, with fewer now than there were this time last year”.
“Excluding bonuses, real wages are growing at their fastest in nearly four years, but pay levels still have not returned to their pre-downturn peak.”
The ONS said average regular pay before tax and other deductions was estimated at £469 per week in real terms in June 2019. This was lower than the pre-recession peak of £473 per week.
Tom Stevenson, investment director for personal investing at Fidelity International, said: “The UK’s labour market is still the bright spot in the British economy.”
“Many households will feel they are enjoying a more comfortable standard of living at the moment. More people are in work than at any time since 1971.”
Tej Parikh, chief economist at the Institute of Directors, said the rise in unemployment shows the jobs market “may now be reaching its peak”.
“With investment in machinery and technology often deemed too risky right now, businesses have sought to bring on board more staff to help lift output,” he said. But this has meant “firms have found it harder to fill their openings”.
PwC chief economist John Hawksworth said that “productivity growth remains very weak”, with output per hour down by 0.6 per cent in the second quarter of 2019 compared to a year earlier.
“Weak productivity growth reflects subdued corporate investment growth over the past three years as businesses wait for greater clarity on Brexit.”
Public expectations for how the UK economy will fare over the next 12 months are at their lowest level in more than seven years, according to a new report released today.
The Office for National Statistics (ONS) has said the outlook for the general economic situation for the year ahead is worse than at any point since the final quarter of 2011.
Expectations for higher unemployment for the year ahead have also been climbing and are now higher than at any point for the past five-and-a-half years.
The data, sourced from a Eurobarometer consumer survey, comes days after the ONS found that the British economy shrank for the first time in nearly seven years during the second quarter of 2019.
Over the three months to June, output fell 0.2 per cent, missing expectations of a flat performance and dropping 0.5 per cent compared with the previous year.
Amanda Mackenzie, chief executive of charity Business in the Community, said: “If this latest survey is anything to go by, the British public has got its finger firmly on the pulse of the UK economy.
“Prescient Brits have been expecting higher unemployment and for the general economic situation to deteriorate, and following last week’s negative GDP number they may well be proved right.”
She added: “With a no-deal Brexit looming, the UK economy is arguably at its most crucial juncture for a decade and it’s no surprise people feel less secure about their jobs and the broader economic picture.
“Staff anxiety levels will almost certainly increase if we enter a turbulent period for the UK economy and businesses have a key role to play in their employees’ wellbeing, not just economic but personal.”
Today’s report, which was focused on personal and economic well-being in the UK, also found that net financial wealth per head increased by three per cent for the quarter ending March 2019 compared to the same quarter a year ago, led by increases in equity and investment fund shares.
The latest Office for National Statistics (ONS) findings for labour output for January to March show that productivity has decreased for the third consecutive quarter in the UK; amounting to over £5,000 in lost wages for workers. In fact, according to the ONS, productivity over the last decade is lower than at any time during the 20th century. The UK has a productivity crisis on its hands, that fact is unavoidable – but who is being impacted the most and what is causing it?
The UK’s engine room is stalling
The ONS statistics on labour productivity confirmed what we already knew: The UK is working inefficiently. That is a useful top-level summary but it doesn’t examine the minutiae of the problem. And if the UK is to put an end to this cycle of wasteful work, we need to delve deeper into which segments of the business world are having the toughest time.
Our own research has found that managers in mid-market organisations are wasting over a fifth of their year on non-core activities. In other words, UK mid-market managers might as well not be working for two months of the year. And with mid-market businesses making up two thirds of the UK’s private sector workers, it’s easy to see why the UK has a productivity puzzle to solve. If people in management roles are spending valuable time on admin that could be automated rather than on the day-to-day tasks that need to get done, that’s going to have a knock-on effect on the people they manage and the customers they serve.
Unsurprisingly, the outlook doesn’t look much brighter further down the pecking order. While managers are increasingly spending time on non-core tasks, the picture is only marginally less serious for employees as a whole, with 16 per cent of their time also being spent on tasks not central to their role. Across the board, organisations are not getting the most out of their employees, owing to staff having to spend valuable time dealing with non-essential tasks.
Scaling is making productivity even tougher
Companies are suffering even more with the productivity challenge as the business grows. For example, small business employees are spending an average of 26 days a year on non-core tasks; this jumps up the bigger the business, as growing SMEs (with between 300-500 employees) spend nearly twice as much time on unproductive tasks, at 43 days a year. Organisations want to grow to increase their output, but the reality is, if the underlying issues and causes aren’t addressed, they’re building on unstable foundations.
The fact that productivity challenges expand as businesses scale, appears to be a symptom of the growing complexity in teams and the need to share more information within and between them. As businesses get larger, they’re more likely to request data more frequently (for example, daily as opposed to weekly). The problem is that just a third of mid-market employees said they have access to the information they need directly from a shared folder or system, with nearly half instead having to request the documents and information they need from others.
Is technology the solution?
While technology should provide a solution to this challenge, having a vast number of systems in growing businesses appear to actually be contributing to the problem. Over two thirds of mid-level firms are using more than five software systems, and a fifth are using over ten. Worryingly, the majority of software systems used by mid-sized organisations are on separate platforms, and 30 per cent aren’t integrated at all, meaning information is not easily shared. With employees losing valuable time solving problems that are not directly related to their job, finding time-savings wherever possible is crucial to addressing the productivity crisis. Technology should be the answer, but it won’t have the desired impact if the infrastructure in place is inherently inefficient.
It’s evident Britain needs a new way of thinking about productivity. This means casting aside siloed initiatives, and adopting a more holistic, people plus technology approach. Businesses must solve current problems and empower workers with integrated, intelligent solutions that give them the freedom to do more of the work that creates value – whether that’s spending more time in the classroom in education, creating greater emphasis on patient care in health, or increased output in manufacturing. That’s how the UK will start to see real, tangible improvement in labour performance.
Sterling skidded again on Friday, hitting its lowest in more than two years, after an unexpected second quarter contraction in the economy alarmed investors already fretting that Britain is headed for a no-deal Brexit.
The pound, which has lost 3.7% of its value against the dollar since arch-Brexiteer Prime Minister Boris Johnson’s arrival in office in late July, sank to $1.2056, the weakest it has been since January 2017, and was last down by 0.5% at $1.2072.
Against the euro, the pound slid to a new two-year low of 92.885 pence and was last down by 0.7% on the day.
The British currency has been close to being the worst performing in the developed world these past couple of weeks since Johnson became prime minister on July 24.
Britain’s economy shrank at a quarterly rate of 0.2%, the first contraction since 2012 and below all forecasts in a Reuters poll.
Year-on-year economic growth slid to 1.2% from 1.8% in the first quarter, Britain’s Office for National Statistics said, its weakest showing since the start of 2018.
British government bond yields fell as investors sought safety in fixed income assets.
UK domestic stocks weakened, although London’s export-heavy blue chip FTSE 100 index clawed its way back into positive territory as sterling plunged.
Some investors now expect Britain to enter a technical recession, which represents two consecutive quarters of negative growth, if the economic situation continues to worsen.
“Overall, these are clearly a disappointing set of figures which have significantly raised the likelihood of a technical recession,” said Azad Zangana, senior European economist and strategist at Schroders.
The pound has suffered a torrid few weeks as investors priced in the growing risk of Britain exiting the European Union under Johnson on Oct. 31 without a deal to smooth the transition.
BNP Paribas raised on Friday the probability of a no-deal Brexit to 50% from 40%. Some analysts say there could be more pain to come.
“As the political risk premium rose, sterling was the worst-performing major currency in each of May, June and July, but the negative risk premium can still rise further,” RBC Capital Markets analyst Adam Cole said.
Johnson is planning to hold a parliamentary election in the days after Brexit if lawmakers sink the government with a no-confidence vote, British media have reported, further unnerving currency traders.
It is growing increasingly likely that Johnson will face a vote of no confidence soon after Sept. 3, when parliament returns from its summer recess, analysts say.
Johnson says Britain, which voted for Brexit in 2016 by a 52%-48% margin, must leave the EU on schedule on Oct. 31, with or without a divorce deal with the bloc. Delaying an election until after Brexit could be a tactic to ensure that happens even if parliament withdraws support for his government.
Vasileios Gkionakis, global head of forex strategy at Lombard Odier, said he was worried about an election, but was also ready to unload some sterling short positions he had accumulated since a lot of bad news had been already priced in.
“If no-deal (Brexit) increases in probability, then of course sterling would be a sell, but until then I’m becoming a bit more neutral,” Gkionakis said, adding that he expects sterling to “settle around $1.20” before market participants reassess their expectations of that outcome.
Others in the market mirrored Gkionakis’ views on Friday.
Paul Hollingsworth, senior European economist at BNP Paribas, said he was “reluctant to enter short sterling positions” and that he found “risk-reward more attractive to consider entering structural long sterling positions as we get closer to September”.
The shrinking economic growth in the second quarter did not make investors more confident that the Bank of England will cut interest rates in September. Some economists expect the central bank to embark on more easing soon, however.
“As uncertainty continues to loom over the UK economy, the difficult run of data is expected to continue and the BoE will need to consider its next step carefully as its global peers embark on further rate cuts,” said Geoffrey Yu, head of the UK Investment Office at UBS Wealth Management.
Money markets are pricing in a 25 basis point cut by January 2020.
Reporting by Olga Cotaga with; additional reporting by Tommy Wilkes; Editing by Mark Heinrich
The Bank of England (BoE) again left interest rates unchanged at 0.75%, despite the headwinds buffeting the UK economy. The Bank didn’t follow the Federal Reserve and European Central Bank in turning more dovish, though economic growth is expected to be weaker than previously forecast this year and next. The Bank appears to be caught between a weaker near-term growth outlook and expectations that inflation will rise above the 2% target over the next three years. As markets are clearly pricing in interest rate cuts, the Bank is forced to expect rising inflation over the forecast period, despite their own indications that they intend to raise interest rates.
Despite recent commentary from UK government ministers, the Bank of England continued with its assumption of a smooth Brexit transition. The Bank continues to find itself entangled in a web of planning for ‘no deal’ but being unable to use this as an assumption in its own forecasts. This is creating significant inconsistencies between its outlook and the market forecasts that feed into it. Some Monetary Policy Committee (MPC) members have recently provided their opinions on the outlook in the event of ‘no deal’ but the need to remain apolitical continues to prevent the wider committee making a decisive assumption. However, as Governor Carney commented, a no deal Brexit may require a range of different responses depending on the actual outcome and future relationships. A shift to a ‘no deal’ assumption remains potentially the most obvious catalyst for a shift in the Bank’s interest rate forecasts, though this itself comes with additional political risks in the assumptions made.
At some point, if global growth continues to slide and Brexit-related uncertainty remains an additional drag, the Bank might be forced to change its forecasts anyway. In the meantime, the fog of Brexit continues to pervade the decision-making of every UK institution and corporate. This is likely to weigh on sterling and gilt yields in the near term, though breakeven rates may continue to drift higher, in contrast to other major sovereign bond markets.
Business confidence in Scotland plunged to zero per cent in July as continuing political and economic uncertainty dampened industry outlook, according to new analysis.
Figures revealed in the latest Bank of Scotland Business Barometer indicate that sentiment among Scottish companies dropped by 17 points to reach zero last month.
It marks several months of yo-yoing for the lender’s index, which previously stood at zero in May, before surging 17 points higher in June.
The index can fall into negative territory, as it represents a balance of the percentage of companies that are positive in outlook against those that are negative.
Across the UK, overall confidence held steady in July at 13 per cent, in line with this year’s average, but markedly lower than the long-term average of 24 per cent.
The Bank of Scotland report indicates that companies in Scotland reported lower confidence in their own business prospects in July – falling by 26 points to 6 per cent.
Across Scotland, a net balance of 25 per cent of companies said they felt that the UK’s exit from the European Union was having a negative impact on their expectations for business activity, down four points on a month ago.
Fraser Sime, of Bank of Scotland Commercial Banking, said: “Current political and economic uncertainties are clearly at the forefront of Scottish businesses’ minds.”
UK-wide, trading prospects for the year ahead fell by three points to 19 per cent, but economic optimism rose by one point to 6 per cent.
Manufacturing emerged as the most upbeat sector across the UK, with overall confidence rising nine points to 19 per cent and overtaking retail, which fell five points to 17 per cent. Meanwhile sentiment in the construction industry dropped 11 points to six per cent, marking the sector’s lowest reading in more than 18 months.
Paul Gordon, managing director for SME and mid corporates at Lloyds Bank Commercial Banking, said: “The UK manufacturing sector may have been boosted by the truce in the trade war between China and the US, which hopefully marks an upturn for this sector and could paint a more optimistic outlook for coming months but broader political uncertainty is expected to weigh on the outlook.”
Today’s barometer readings come after the Bank of England (BoE) yesterday warned there was a one-in-three chance of the UK economy shrinking at the start of next year as Brexit uncertainty takes its toll.
Speaking as the monetary policy committee held interest rates at 0.75 per cent, governor Mark Carney said: “Profound uncertainties over the future of the global trading system and the form that Brexit will take are weighing on UK economic performance.”
The BoE also cut its growth forecast to 1.3 per cent for both this year and next, down from the 1.5 per cent and the 1.6 per cent previously predicted.
Britain is still “underprepared” for a no-deal Brexit in October, a major business lobby group has warned Boris Johnson.
In a new report, the CBI – which represents 190,000 UK businesses – said firms had been undermined by unclear advice, cost and timelines on what leaving the EU without a deal would mean.
And they make clear that the European Union itself is also not ready for a no-deal outcome.
The warnings came as it was reported that the Government is planning a £100m no-deal advertising blitz over the next three months, as Mr Johnson ordered a shake-up of Whitehall to ready the UK to leave without an agreement on 31 October.
In its new report, the CBI says 24 out of 27 areas of the UK economy will face disruption if the country leaves the EU without a deal, and it calls on ministers to “step up” preparations for a hard exit.
The CBI calls on the Government to “immediately” put the civil service “back onto a no-deal footing” and review all Brexit preparedness advice drawn up for the previous exit date of March 2019.
The Government should meanwhile launch a “targeted” communications campaign and adopt a “refreshed, transparent” approach to its planning, the CBI says.
Ministers are also urged to consider shortening the summer Parliamentary recess and curtailing party conferences to allow enough time to pass vital no-deal Brexit legislation.
Meanwhile the EU is told to “come to the table and commit” to matching the “sensible” planning already carried out by the UK.
The CBI’s deputy-director general Josh Hardie said: “Businesses are desperate to move beyond Brexit. They have huge belief in the UK and getting a deal will open many doors that have been closed by uncertainty.
“There is a fresh opportunity to show a new spirit of pragmatism and flexibility. Both sides are underprepared, so it’s in all our interests. It cannot be beyond the wit of the continent’s greatest negotiators to find a way through and agree a deal.
“But until this becomes a reality, all must prepare to leave without one. It’s time to review outdated technical notices; launch an ambitious communications campaign for every firm in the country and rigorously test all Government plans and IT systems.”
While the CBI is urging businesses and government to do all they can to prepare for a no-ldea, Mr Hardie warned that neither side of the negotiations could completely “mitigate” the disruption of Britain leaving without a deal.
“We can reduce but not remove the damage of no-deal,” he said.
“It’s not just about queues at ports; the invisible impact of severing services trade overnight would harm firms across the country.”
The CBI’s warning came as The Telegraph reported that Mr Johnson is planning to channel £100m into a no-deal spending advertising blitz over the next three months.
The push could include a leaflet on no-deal preparations being sent to every home in the country.
According to the paper, Chancellor Sajid Javid will unveil wider plans for an extra £1bn in no-deal prepartion spending later this week.
Mr Johnson has meanwhile set up a new “exit strategy committee” in Whitehall to lead on Brexit planning, The Times reports, with Cabinet Office minister Michael Gove heading up a new “operations committee” that will meet daily and lead on no-deal work.
British business activity, which has been buffeted by the country’s Brexit crisis, fell again in the three months to July but is expected to pick up over the next three months, the Confederation of British Industry said on Sunday.
The balance of firms reporting growth stood at -9%, indicating a less widespread slowdown than June’s -13%, which was the weakest reading in nearly seven years, the CBI’s monthly Growth Indicator showed.
An indicator measuring expectations for the next three months was the strongest since October last year at +9%.
Britain’s economy has been whip-lashed by the twists and turns of Brexit so far in 2019 and by a slowdown in the global economy, caused in large part by rising trade tensions between the United States and China.
Growth was strong in the first three months of the year, as many companies tried to complete work before possible disruption after the original March 29 deadline for leaving the European Union, which has since been pushed back.
The hangover from that early 2019 rush is widely expected to have caused gross domestic product to flat-line or even contract in the second quarter.
“We expect underlying growth to remain subdued with risks from Brexit and global trade tensions remaining high,” Annie Gascoyne, the CBI’s director of economic policy, said.
Britain’s new Prime Minister Boris Johnson has said he is prepared to lead Britain out of the EU without a deal on Oct. 31 if necessary.
That new Brexit deadline could cause a repeat of the stock-building seen in early 2019, some economists have said.
Reporting by William Schomberg, editing by David Milliken
In spite of the Brexit cloud hovering over the British Isles, the UK economy itself has proven surprisingly resilient.
Low unemployment, a pick-up in wage growth relative to inflation, and expansion in the dominant services sector would all normally be welcomed by investors. Should we view the UK as an attractive place to invest, despite its political woes?
At around 4 per cent, UK unemployment is brushing up against historical lows, and faring much better in this regard than its European counterparts, with the exception of Germany.
Indeed, the UK’s latest jobs market data demonstrated the lowest unemployment rate since the 1970s, at 3.8 per cent.
Meanwhile, on mainland Europe, unemployment in France, Italy and Spain is around 9 per cent, 10 per cent and 15 per cent respectively – although these countries do usually have structurally higher levels of unemployment than the UK.
UK unemployment is at historic lows
In the corporate sector, confidence has stagnated
Brexit and political turmoil has stalled capital spending plans
Typically, with lower unemployment comes upward pressure on wages, which we are witnessing in the UK today.
In the three-month period to the end of May 2019, total earnings (not including bonuses) rose by 3.6 per cent – the highest since mid-2008.
Low and stable inflation is allowing this wage growth to translate into rising disposable incomes and increased spending power for British consumers – further good news for the economy.
Against this favourable labour market backdrop, UK interest rates have remained benignly low, and are likely to stay that way for the foreseeable future.
We believe that the Bank of England is ultimately looking to increase its store of dry powder in advance of any future recession – that is, raising interest rates so that it has room to cut them again in periods of economic weakness. For now, paralysed under a weight of Brexit uncertainty, it has little choice but to remain on the sidelines.
Over the longer term, we anticipate only gradual and minimal interest rate increases, particularly given the levels of debt in the economy.
In the corporate sector, confidence and investment have both stagnated – typically a bad sign for economic growth – and more recently this has been evidenced in weaker economic data. However, rather than invest, UK businesses are currently stockpiling high levels of cash.
These excess corporate savings, held tight by nervous businesses, could be released if a Brexit resolution materialises. In turn, this could offer a potentially significant investment boost to the UK economy.
Nonetheless, the outlook for the UK economy is troubled, not least by a lack of clarity on Brexit, as well as the entwined domestic political turmoil.
This week, Conservative party members chose their next party leader, and by extension the new prime minister.
Shortly after, the UK will be back to the negotiating table with the EU, which has previously made clear that it has no intention of reopening the withdrawal agreement. However, a change of leadership in the UK and at the top of key EU institutions may just provide fresh impetus to the discussions.
Given the deeply uncertain political backdrop, the ‘wait and see’ attitude currently being adopted by investors is entirely understandable, as is the mirroring of this unease in the corporate world.
It is worth noting that while businesses stockpiling their cash could well mean a boost to the economy in the future, in today’s terms this means that growth in corporate investment has stalled.
Prolonged uncertainty surrounding Brexit could delay capital spending plans further, without the guarantee that these funds will be released into the economy in the future.
The UK’s dominant economic sector, services, is still in expansionary territory, which is encouraging.
However, in keeping with the global growth picture and concerns around global trade, the UK’s manufacturing sector, albeit much smaller than its services sector, is more troubled, with the latest business surveys showing that it is in contraction.
Further, there are key pockets of weakness in both the retail and real estate sectors, both of which faced an especially challenging 2018.
In addition, the UK has some notable structural problems. Perhaps most conspicuously, it has yet to deal effectively with its debt issues. The UK still sports twin deficits, meaning that the government spends more than it earns (fiscal deficit) and the country imports more than it exports (trade deficit), making it a net borrower overall.
In spite of its challenges, the UK has remained economically robust, and in the future could become an attractive place to invest once more.
The limited political will for a no-deal Brexit outcome is indeed a positive sign for domestically-focused UK assets and the potential for sterling strength ahead.
Nevertheless, UK shares remain markedly unloved by investors, and as a result they are also relatively cheap, appearing good value by virtually all measures, but particularly on price-to-book ratios (the total value of a company’s shares versus the value of its net assets).
Given its out-of-favour status, any change in sentiment could see large capital inflows to the UK stock market and provide a boost to valuations.
However, this simply cannot occur until we have more clarity in UK politics. Without this, and a more certain understanding of our future relationship with Europe, it is hard to justify significant further investment in the UK market in the near term.