Business cycle indicators for the United Kingdom are trending negative as the UK proceeds realizes the real-world consequences from Brexit, hanging on a thread by slight improvements in Britain’s consumer confidence and retail sales.
Some analysts argue that the UK’s Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis continues to grow at October 2019 thanks to a respectable 3% annual increase. However, business cycle slowdowns typically happen within roughly 8 to 16 months from a peak in a country’s GDP.
GDP tracks a long-term growth trend via business cycles of growth or recession that repeat approximately every 5 years or so, albeit that no two business cycles mirror the same duration or size. America’s National Bureau of Economic Research states that there were 33 business cycles from 1854 to 2009.
Bear in mind that cyclical indicators are erratic with multiple major influences. Even more confusing is the fact that no consensus exists for which indicators universally signal business cycles in all cases.
To impose some structure on this chaos, The Economist organizes its benchmarks into 3 critical categories: leading indicators that turn in advance of a cycle change; coincident indicators that define when the overall business cycle turns; and lagging indicators that top out following a business cycle.
UK’s Leading Business Cycle Indicators
Britain’s prime lending rate remains at 0.75%, too low for further monetary easing. Among the 5 other selected leading indicators, 3 economic signals deteriorated over the latest 12 -month period.
The Economist estimates that an economy hits its highest level about 8 to 16 months after business and consumer confidence starts to drop. There are shorter timeframes in advance of an economy’s GDP peak for slowdowns in car sales (6 months) and building permits (2 to 3 months).
- Interest rates: 0.75% at Jan. 2020 (no change from 12 months earlier)
- Business confidence: 98.7278 points at Jan. 2020 (down -2.3% from 101.0978)
- Building permits: 39,510 at Sep. 2019 (down -11.2% from 43,923)
- Consumer confidence: 100.4516 points at Jan. 2020 (up 0.7% from 99.7552)
- Retail sales: Up 2.47% at Jan. 2020 (up 0.42% from up 2.05%)
- New car sales: 149,279 vehicles at Jan. 2020 (down -7.3% from 160,176)
Business confidence is an indicator based on opinion surveys revealing how pessimistically or optimistically business managers perceive their companies’ future potential and therefore can anticipate turning points in economic activity. In contrast, consumer confidence measures public opinions on standardized questions about household finances, a country’s economy in general as well as plans for major purchases on durable products lasting over a year or buying a home or an automobile.
Building permits mean official authorizations required before new building construction can proceed. Building permits are a leading macroeconomic indicator for both country and global business cycles. Typically, construction work starts immediately after a building permit is granted.
Retail sales refers to an aggregate measure of the percentage change in the retail sales index against the same month in the prior year. It measures consumer demand for finished goods and is considered a major macroeconomic indicator of whether an economy is moving towards contraction or expansion. Retail sales focus on volume changes only and exclude price level movements.
The car sales metric specifies the number of new passenger cars sold irrespective of price.
UK’s Coincident Business Cycle Indicators
Percent changes in Gross Domestic Product (GDP) on a Purchasing Power Parity (PPP) basis are much-scrutinized headline numbers that define whether an economy is contracting or expanding. That’s because year-over-year GDP changes coincide with and thus signal the start of a recession or boom period.
The latest GDP on a PPP basis statistics reveal that the UK’s economy is relatively healthy given the positive annual growth.
- GDP: US$3.131 trillion at Oct. 2019 (up 3% from $3.039 trillion)
- GDP per capita: $46,827 at Oct. 2019 (up 2.4% from $45,741)
Please note that the United Kingdom’s share of the world’s overall GDP of $141.860 trillion was 2.2% at October 2019, the same as one year earlier.
In addition, the UK’s GDP per capita income of $46,827 is about 2.5 times greater than the global average GDP per person of $18,391 as of October 2019.
UK’s Lagging Business Cycle Indicators
All 3 of the selected lagging indicators worsened compared to the same metrics in the prior year. The most severe decline belongs to the crucial capital investment to GDP ratio from 2019 to 2020.
Usually capital investment shadows GDP peaks and valleys via a 12-month delay. Both inflation and unemployment accelerate about 6 months after GDP reaches its maximum growth.
- Capital investment to GDP ratio: 16.248% in 2020 (down -0.175% from 16.423%)
- Unemployment rate: 3.845% in 2020 (up 0.03% from 3.814%)
- Inflation rate: 1.944% in 2020 (up 0.136% from 1.808%)
The ratio of capital investment to GDP is a lagging but future planning-oriented indicator that records the value that a country spends on capital development and infrastructure projects divided by its overall GDP output on a PPP basis.
Unemployment rate is a percentage based on a country’s total labor force, not its full population. It is a critical metric since most mortgage holders experience severe difficulties paying their debt obligations once they become jobless.
Inflation rate documents the percentage change in average consumer prices in a country over a one-year period, and measures cost-of-living.
Research Reference Materials:
Forbes, Recession Is Overdue By 4.5 Years, Here’s How To Prepare. Accessed on February 16, 2020
MarkLines Automotive Industry Portal, UK Flash report, sales volume, 2020. Accessed on February 16, 2020
National Bureau of Economic Research, US Business Cycle Expansions and Contractions. Accessed on February 16, 2020
The Conference Board, Global Consumer Confidence Unchanged in Q3. Accessed on February 16, 2020
The Economist, Guide to Economic Indicators: Making Sense of Economics (7th Edition). Accessed on February 16, 2020
Trading Economics, Interest Rate: Europe. Accessed on February 16, 2020
Wikipedia, Consumer confidence index. Accessed on February 16, 2020