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August 13, 2019

Is Britain on the cusp of a recession?

Is Britain on the cusp of a recession?

According to official figures for the second quarter of the year, amid Brexit turmoil, Britain’s economy has shrunk and it might be on the cusp of recession. The pound has tumbled to a 2.5-year low and gross domestic product (GDP) has fallen 0.2% in the April–June period for the first time in almost seven years, according to the Office for National Statistics (ONS). This is due to a slump in the construction and manufacturing sectors. If the economy shrinks further in the third quarter of the year, Britain will enter a recession, ahead of Brexit.

IHS Markit economist Chris Williamson commented: “The latest data reveal an economy in decline and skirting with recession as headwinds from slower global economic growth are exacerbated by Brexit-related paralysis.” “Manufacturing output fell back after a strong start to the year, with production brought forward ahead of the UK’s original departure date from the EU. The construction sector also weakened after a buoyant beginning to the year, while the often-dominant service sector delivered virtually no growth at all,” Rob Kent Smith, ONS head of GDP added.

IZA World of Labor author Tulio A. Cravo has looked at the correlation between firm sizes and business cycles; specifically whether small businesses shed proportionately more jobs than large businesses during recessions. In his article, Cravo notes: “The prevailing view based on recent data for developed countries is that large firms are proportionately more sensitive to business cycles, implying that they hire more excessively during booms and fire more rigorously during recessions.”

Last month, the government’s official forecaster warned that Britain would enter a year-long recession if the country leaves the EU without a deal. According to Bank of England Gov. Mark Carney, a no-deal Brexit could also undermine whole sectors of the economy such as the automotive industry and farming. XTB analyst David Cheetham said: “Given the growing threat of a no-deal Brexit that looms menacingly overhead, it would not be at all surprising if the current quarter also shows a contraction—therefore meeting the standard definition of a recession.”

IZA World of Labor author Nick Drydakis has also looked at the relationship between recessions and health. According to him, health-related impacts of economic recessions have shown inconsistent results. In his article, he notes: “During recessions, an increased number of unemployed and low-income people rely more heavily on state health benefits, which tend to receive less support from governments due to contracting national budgets. […] Governments should acknowledge that the potential impact of recessions on people’s health depends on the extent to which people are protected from vulnerability.”

Read Tulio A. Cravo’s article Firm size and business cycles and Nick Drydakis’ article The relationship between recessions and health.