UK is entering ‘mid-cycle slowdown’

UK is entering ‘mid-cycle slowdown’

A “clear deterioration” in growth indicates the UK is now entering a “mid-cycle slowdown”, according to analysts at Citigroup.

The investment bank’s latest UK economics research note suggested the UK’s spell as the fastest-growing economy in the G7 was likely to be short-lived as leading indicators started to slow, particularly those in export sectors.

Yesterday, government statistics showed growth slowed to 0.5 per cent in the third quarter from 0.7 per cent in the second.

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However, pubished prior to the GDP statistics publication, Citi said there were “fairly clear signs that the [UK] economy is now slowing”.

The Office for National Statistics said the fall in growth was down to poor construction and manufacturing performance over the quarter.

Citi noted the quarterly economic survey by the British Chambers of Commerce showed its weakest reading for manufacturers’ exports since 2009, with the average reading for new orders the lowest since 2013.

At the same time, several other surveys lacked positivity.

These include the average of the purchasing managers’ index and the activity components of the Bank of England’s agents’ survey.

Meanwhile, recent UK inflation statistics showed price growth turned negative last month for the first time since April and only the second time since 1960.

But Citi’s analysts remained confident in the domestic economy, and noted that the “underpinnings of the current UK expansion” were solid, rather than suggesting the growth cycle was at an end.

The bank pointed to the rise in real household disposable income – which was up 3.6 per cent year on year in the second quarter – and corporate profits, which have increased 25 per cent in the past three years.

“The ratio of profits to GDP in recent quarters is back to the pre-crisis [2006] peak, and the rate of return on capital is high by historical norms,” the report said.

“Corporate liquidity remains buoyant, with bank deposits held by non-financial companies up 11.6 per cent year on year in August, the highest pace since 2007.”

The bank also noted the average time from the end of one recession to the start of the next had been 10 years. The expansion at this stage was only slightly more than six years old as the trough in real GDP was in the second quarter of 2009.

However, Citi admitted “expansions do not run on a clock that automatically cuts off after five or 10 years”.

It noted that the UK’s current account deficit – at 4.4 per cent of GDP in the first half of this year – remained “relatively high”. The bank said this represented a potential warning sign given previous recessions were preceded by persistent deficits.

But the bank added that the shortfall “is not the usual story of a surging trade deficit” as this fell to 0.7 per cent of GDP in Q2 – a 17-year low.

The current account deficit was in fact a “side effect of the very low yield on the UK’s external assets”, and in its view there was “little risk of domestic-driven weakness”.