The new measures introduced by the Bank of England yesterday to pre-empt Brexit fall out raises the question of whether predictions of recession are at risk of becoming a self-fulfilling prophecy
In June, then chancellor George Osborne asserted that UK could lose out on £30 billion in public finance by leaving the EU, which could lead to immediate budget cuts.
While whether his rhetoric could have been an attempt to sway the voting public to vote to stay in the EU is debatable, our current period of post-Brexit volatility suggests we may run the risk of talking ourselves into a recession.
The recessionary spiral
In marketing, plastering A-list celebrities as endorsers of products has proven to work. Similarly in the case of politics and the economy, influential people have a direct impact on public confidence. If economic experts or the mainstream media speculate an upcoming recession, it can make people nervous about the nation’s economic future. Almost like the chicken-and-egg riddle, people then cut back on spending and increase saving.
Less spending means less demand for products and services, which can have an immediate impact on businesses that rely on a steady stream of customers to balance their books. These businesses may cut back on employment and investment in an effort to stay afloat.
This could result in lower employment figures and lower investment, leading to a greater fall in demand.
While confidence remains central to staving off recession, if the Government fears recession will harm the state of the economy, the knee-jerk response would be to pre-emptively cut back on spending and increasing taxes.
If economic experts or the mainstream media speculate an upcoming recession, it can make people nervous about the nation’s economic future.
Are we seeing signs of this?
Over the past month, GrowthBusiness has seen a lot of post-Brexit speculation from business leaders, finance providers and recruitment firms. Studies reveal that SMEs are less inclined to invest in their business, already showing signs of shoring up capital for what could be an imminent ‘rainy day’.
In terms of consumer confidence, the UK’s longest running barometer, based on research carried out by GfK on behalf of the European Commission, suggests that July has seen a dramatic 11-point drop, the sharpest monthly fall in 26 years.
All five measures used to calculate the consumer confidence index saw decreases in the month following the referendum.
“Consumers in post-Brexit Britain are reporting higher levels of concern this month. We’ve seen a very significant drop in confidence, as is clear from the fall in each of our key measures, with the biggest decrease occurring in the outlook for the general economic situation in the next 12 months (-19 points),” Joe Staton, head of market dynamics at GfK, explains.
Although the rate of decline is slower than reported in the aftermath of the vote to leave the EU, the barometer reveals that UK consumers were also less optimistic about the state of their personal financial situation going forward.
“However, the Index continues to remain at a relatively elevated level by historic standards. Its future trajectory depends on whether we enter a new period of damaging economic uncertainty or restore confidence by embracing a positive stance on negotiating a new deal for the UK,” according to Staton.
What we haven’t seen
In terms of employment, reed.co.uk’s recent nationwide study revealed that the UK’s firing on all cylinders. In fact, more than two thirds of the nation’s employment sectors are healthier than they were in July 2015.
We’ve also largely expected short-term economic volatility. In the lead up to the EU referendum, both the Leave and Remain campaigns conceded that an exit vote would inevitably lead to short-term uncertainty.
As mentioned, the result of this uncertainty could discourage investment and spending on the demand-side, which could cripple the supply-side: the businesses, financiers supporting the economy. Expecting this volatility, however, suggests a confidence buffer.
In a recessionary environment, the Government may raise taxes and cut spending expecting lower economic growth in the coming years, but we have only seen the opposite.
Yesterday, the Bank of England further reduced the base rate of interest from a low 0.5 per cent to an even lower 0.25 per cent.
If modern economics has taught us anything, it’s that cutting public spending and increasing taxes will definitely lead to a recession. Even speculation that this could happen could be enough to hit consumer confidence, prompting people to save.
BoE’s expansionary monetary policy in lowering interest rates further is a strong response in countering the recessionary spiral.
Other measures could include an expansionary fiscal policy to keep the public spending, and more positive, confidence-boosting rhetoric from the media, influential economists, the government and business leaders.
According to Lee Wade, CEO of British technology provider, Exponential-e, UK leaders may put a stop on investments by fuelling insecurity. “Instead, focus on keeping the taps of investment flowing. Speak of the great opportunities that lie ahead for Britain and get on with projects like true digital transformation and delivering high speed connectivity,” he advises.
Innovate to attract investment
Concerns over the falling value of the Pound is actually expansionary for the economy, potentially bolstering exports. Conversely this could also lead to a fall in inward investment as investors may avoid ploughing money into the UK.
Exponential-e’s Wade believes the UK needs to maintain investors confidence and focus on innovation to navigate its way out of the EU.
“The huge increase in targets for asset purchasing from £375 billion to £435 billion, to include £60 billion worth of gilts and £10 billion worth of corporate paper, is also welcome, with more action likely to come in coming months as Mark Carney battles to keep the UK out of recession.”
Ultimately, very little may change for a few years following the vote, as a full and final Brexit will take time. New deals will need to be cemented, and new relationships will need to be forged. In the interim period, keeping confidence high may be our best bet in avoiding the dreaded R word.
INFOGRAPHIC: The UK’s post-Brexit consumer confidence heat-map