Survey evidence is regarded here as of limited use for tracking and forecasting economic developments. It may, however, be noteworthy that the EU Commission’s UK business and consumer surveys for July released today are less bleak than last week’s “flash” PMIs.
The Commission calculates an “economic sentiment indicator” (ESI), which is a weighted average of confidence measures covering consumers, services, industry, retailing and construction. These confidence indicators are derived from surveys conducted by GfK (consumers), the CBI (services, industry and retailing) and Experian (construction). The ESI fell to a three-year low in July but remains above its long-run average, represented by the 100 level – see first chart.
The correlation of the ESI with annual GDP growth is unimpressive (+0.71 over 1997-2015). However, it plunged below 70 during the 2008-09 recession and reached 90 during the recession scares of 1998 (after the Asian crisis) and 2011-12 (the phantom “double dip”).
There are two obvious construction problems with the ESI. First, the weights used to combine the confidence indicators do not reflect the structure of the UK economy – industry, for example, is assigned a 40% weight versus 30% for services, despite the much greater importance of the latter in the UK.
Secondly, the confidence indicators combine assessments of recent and expected conditions. The July readings, therefore, incorporate an element of pre-referendum economic strength.
The second chart includes an alternative indicator that combines the more forward-looking elements of the surveys (e.g. expected demand or orders) with appropriate weights. This indicator fell much more sharply than the ESI in July and is below its long-run average, but not at levels suggestive of a recession. Its correlation with GDP growth, admittedly, is little different from that of the ESI (+0.72).
As previously discussed, the assessment of economic prospects here will be influenced importantly by monetary data, starting with end-June statistics released tomorrow. An oncoming recession would probably be signalled by a contraction of household / corporate narrow money holdings as spending plans were cut back.