The focus on the issue of recession in the context of UK economy has risen during December 2012 and first half of January 2013. In that period the Onalytica Recession-Index (UK Economy) jumped 18%. However, the index has recently started to drop again, while the Telegraph reported that the recovery of the economy is back on track.
The spikes in the downward trend of the index, started at the end of April 2012, show that there is a certain nervousness on the market regarding the health of the UK economy.
The Onalytica Recession-Index (UK Economy) has decreased 14% since a year ago and currently is around the lowest level in a year.
There is a growing feeling that the US Economy is improving.
On 11 December 2012 the Onalytica Recession-Index (US Economy) has decreased by 6.6 percentage points since 7 days before (see first chart below). The underlying trend for both Onalytica Crisis-Index (US Economy) and Onalytica Debt-Index (US Economy) is downward; the former fell 7.9 percentage points, while the latter was 7.6% below its level on 4 December 2012.
In a previous post I highlighted a small example of how the Onalytica Recession-Index gave a good indication of an impending recession in the UK.
However, I haven’t had the opportunity to conduct a more thorough analysis so I recently asked my colleague, Dr. Andreea Moldovan, to have a look at the Onalytica Recession-Index in relation to GDP. Her findings impressed me.
Figure 1 (below) shows the UK GDP against Recession-Index for UK Economy. The values for GDP are given in quarterly percentage (or relative) change on previous quarter.
The Recession-Index is a 1 month leading indicator as it can be seen on the chart.
The series have different scales and are represented on different vertical axes, for ease of chart interpretation. The left vertical axis corresponds to the Recession-Index values, while the right axis is for the GDP.
Since Q1 2010 and except for Q4 2010, the Recession-Index correctly predicts the UK GDP direction of growth (increase or decrease) 1 month ahead. On the chart this is reflected by the series having opposite directions: decrease in Recession perception by the population corresponds to a growth in GDP and vice versa. So, in 8 out of 9 situations analysed the prediction is correct.
OECD is now forecasting that the UK economy will enter a recession (story from Telegraph).
From a macro perspective I guess it is not counter-intuitive that growth comes to a halt when the world is engaged in a massive deleveraging operation; and at the same time impacted by the increasing uncertainty caused by the public finances in the Euro Zone.
But reading the forecast from the OECD I couldn’t help think back on the previous posts on this blog about how the change in online sentiment for some time as indicated that a recession was becoming more likely.
The 2nd of August I wrote this post that showed that those with more influence in the debate on the UK economy were becoming more concerned about a possible recession than the public in general.
Since our influence-weighted analyses usually serve as leading indicators, this was a clear warning sign.
On the 1st of November I wrote this post in which I point out that the Onalytica Recession-Index for the UK economy had reached an all-time high (since April 2010).
In October 2011 the equal-weighted Recession-Index, which represents the sentiment of the board population, actually overtook the influence-weighted, which represents the sentiment of those with more influence in the debate on the UK Economy. The gap has widened in November.
This effectively means that the broad population as a whole are now more convinced that we are heading for a recession and are likely to reign in their spending further.