Is the UK on the brink of recession?

Britain’s economic expansion is expected to have ground to a halt in the second quarter, economists said on Wednesday, after the latest set of official figures set up a summer of speculation over whether the UK is sliding into recession.

The latest monthly statistics from the Office for National Statistics showed a 0.3 per cent recovery in May’s gross domestic product from the 0.4 per cent drop in April, but the boost still left the level of output in the second quarter lower than the average in the first quarter.

The figures almost guarantee a weak first half of the year for the UK economy, requiring Boris Johnson or Jeremy Hunt, to add “possible recession” to the list of pressing concerns, whichever of them enters Number 10 as the new prime minister this month.

The question for the months ahead will be whether the deterioration in economic momentum continues or whether the recovery is now starting.

As ever, economists differ in their predictions. Yael Selfin, chief economist at KPMG, said, “the deteriorating picture across the UK’s service industries is of particular concern”, while Samuel Tombs, UK economist at Pantheon Macroeconomics, predicted better times ahead, with growth boosted by strong consumer spending.

Somewhere in the middle, the National Institute of Economic and Social Research on Wednesday predicted “the economy would narrowly avoid a technical recession” of two consecutive quarters of contraction, with growth of 0.2 per cent in the third quarter following a decline of 0.1 per cent in the second quarter.

On their own, Wednesday’s GDP numbers did not resolve the arguments over the UK’s economic prospects.

The rise in economic output in May was heavily influenced by the restart of production at car factories, just as the decline in April was caused by manufacturers responding to the original March 29 Brexit deadline by bringing forward annual maintenance shutdowns to that month.

More significant was an upward revision to the March output data, which improved the outlook for the whole second quarter, even though this was offset by evidence of an underlying decline in services sector activity growth rates.

As is often the case, revisions affected the picture more than the latest data. When a 0.1 per cent decline in output in March was revised by the ONS to a 0.1 per cent increase, the entire second quarter was immediately cast in a more positive light.

The data show that output so far in the second quarter is below the average for the first three months of the year, but a quarterly contraction in the second quarter no longer looks certain. A small slide in the June monthly data would leave the second quarter showing a contraction, while another 0.3 per cent rise would show positive growth of 0.1 per cent for the whole three-month period.

If the growth figures contained good news, the details revealed bad news, showing more weakness than expected in the services sector, which represents 80 per cent of the economy.

In the three months to May, growth in services output slowed down to 0.3 per cent compared with the previous three months, down from a peak of 0.8 per cent in the three months to August. The sector stagnated in the month of May.

Financial and insurance activities contracted by 0.7 per cent in the three months to May. According to the ONS, “this sector has not seen positive growth since the three months to April 2017, the longest period on record without a rise”.

The big question now is whether the UK economy will see a return to more normal growth rates or whether households and companies will batten down the hatches ahead of likely political turmoil of the autumn.

Business and household surveys point to a pessimistic outlook, with PMI surveys in June in particular suggesting an economy close to recession. Chris Williamson, chief business economist at IHS Markit, which produces the PMI indices, said, “it’s becoming increasingly evident that the underlying health of the economy is also deteriorating”.

With the “new business” section of these surveys falling to its lowest level since April 2009 — the height of the last recession — Mr Williamson said: “Companies report that growing uncertainty surrounding Brexit is compounding worries about slowing international economic growth, dampening spending and investment.”

“Whether the UK enjoys an orderly Brexit with a deal or not, the inventory build-up will eventually need to be run down, which suggests further weakness in economic growth,” said Azad Zangana, senior European economist at Schroders.

However, opposing the view that tough times lie ahead is data showing that real household incomes are continuing to rise and employment rates are at record levels — alongside the knowledge that it is rarely wise to forecast the demise of the UK consumer.

Mr Tombs said the economy would “benefit from brisk growth in consumers’ spending, given that households currently are enjoying solid growth in their real disposable income”.

“Just as the GDP data for the first quarter suggested the economy was stronger than it really was, the data for the second quarter will suggest it’s weaker than it really is,” added Paul Dales, UK economist at Capital Economics. “As the truth lies somewhere in between, GDP will probably rise in the third quarter.”

If the outlook fails to improve, the run-up to the October 31 Brexit deadline will be a nervy affair for economists as well as politicians. Most expect that a no-deal outcome would depress growth. If the starting point was relatively weak, it would not need much to tip the UK economy over the edge.