The UK recession probability indicator followed here continues to signal a stronger economy in 2013. The estimated probability of another activity dip has fallen significantly over the last 12 months and currently stands at below 1% – the lowest since 2003 and a level historically associated with solid GDP expansion.

The model uses currently-available information on a range of monetary and financial indicators to assess the probability of the economy being in recession three quarters ahead, with a recession defined here as an annual fall in GDP (i.e. a stricter requirement than the commonly-used formulation of two consecutive quarterly declines). It correctly signalled that 2012 would be a poor year – the estimated likelihood rose to 47% at end-2011, a level suggestive of economic stagnation rather than outright recession. According to provisional figures released last month, GDP was unchanged in 2012 although the onshore economy grew by 0.2%. The chart shows the historical performance* of the indicator, with the reading at each date referring to the probability of a GDP decline three quarters later.

The recent fall in the indicator reflects a combination of a decline in interbank interest rates, faster real money supply growth, narrower credit spreads, stock market strength and exchange rate weakness. The indicator has been at 1% or below in 58 of 184 quarters since 1966, i.e. 32% of the time. The median annual rise in GDP three quarters after such a reading was 4.0%. Slower trend growth and fiscal / external headwinds imply much weaker prospects now but GDP expansion in 2013 may nonetheless exceed the consensus projection of 1.0% by a significant margin.

*In-sample estimates from model fitted to data up to Q1 2012.