Brexit: are we talking ourselves into recession?

With everyone talking about the negative impact of Brexit, could another UK recession be a self-fulfilling prophecy?

Among the many warnings, comments and laments triggered by the Brexit vote, one prediction has been made repeatedly: the UK is now heading for recession.

It certainly looks likely, thanks to the skittish markets, sterling’s plunging value and the serious-faced speeches from important financial experts like the Governor of the Bank of England.

But there’s also another warning that’s going almost unheard; if we’re not careful we will talk ourselves into a recession that is not yet inevitable.

Maybe baby

The Monday after the market-shocking vote, consumer champion Martin Lewis told the BBC that the public should “keep calm, carry on” and make Britain “a better, fairer place where the economy doesn’t tank”. He warned there is a risk we would “talk ourselves into a recession”.

And he’s not the only one; Mike Coupe the boss of Sainsbury’s has also warned that Britain “is in danger of talking itself into a recession” following coverage of the vote.

Glyn Roberts, chief executive of the Northern Ireland Independent Retail Trade Association, has warned that political crisis could be what drives the country into deeper financial difficulties. The Belfast Telegraph reports him saying: “Unless we get confidence and stability restored soon we could talk ourselves into a mini recession.”

But what does that mean and how might it happen?

Recession 101

The theory is relatively simple: enough news stories about banking crisis, house prices at risk, financial instability then people are bound to get nervous about their economic future. 

Essentially, if you yell ‘GLOBAL ECONOMIC DOWNTURN’ at people long enough, they start thinking their money might be better off in a rainy day account rather than splurged on a big holiday or new TV.

Their lower spending means that businesses see a fall in demand, causing them to cut back on workers’ hours and on investment, affecting the companies that feed into them. As employment falls and the economic warnings get starker, more people save their cash instead of spending it and the vicious circle continues.

Of course the Brexit vote has had a real impact on confidence. Recently the International Monetary Fund adjusted down its global growth forecast by a tenth over the next two years, predicting that the UK specifically will see a reduction of two-tenths this year and 0.9 percentage points next year. That’s not just a drop; the agency had been considering upgrading its global growth predictions before the Brexit vote happened because the outlook was improving.

If the story is that negative consumer sentiment is to blame for some economic instability, then it’s probably time for a guilty aside. As an ardent Remainer, I am guilty of gleefully sharing news stories of financial doom around my social media network as if to scream ‘LOOK AT WHAT YOU’VE DONE TO MY CHILDREN’S FUTURE’ in the faces of those who voted Out. I can’t be alone, so there’s a certain amount of ‘told you so’ sentiment that may not be helping us out of this quagmire.

Destroy your debt with 0% balance transfer deals lasting up to 41 months!

Unpicking the symptoms from the causes

So, all this talk of recession damages consumer confidence and we all start keeping our money in case of a rainy day rather than spending it on new sofas and days out. But is that enough to spark a recession?

Tony Reynolds is retail and consumer strategy consultant at Pragma, the London-based advisors for businesses and investors in consumer markets. He suggests that consumer spending is a symptom and not a cause.

He explains: “Consumer spending in itself doesn’t create value for an economy. Rather, it drives business behaviour. When times are good, businesses will invest that spend, be it through new jobs, new products, new stores and so on. And when they’re less comfortable, they may choose to defer investment decisions or hold back on spend.”

“Consumer spend levels are an output of available discretionary income and, the availability of consumer credit. At Pragma, we’d see these as indicators of a recession in progress, rather than forecast measures… It’s perception versus reality. Businesses may see reduced consumer confidence as a reason to press pause on investment in jobs, bonuses and growth plans, feeding into the confidence cycle. Consumer behaviour is a symptom rather than a cause.”

If that’s the case then we can’t really talk ourselves into recession; it’s all just another string in a knot that pulls together.

So should we all just shut up?

Okay, if we do actually risk shoving the country off a big recession-shaped cliff by discussing the chances of falling off that cliff then what can we do?

Financial storms aren’t inevitable, they are affected by the nation’s mood and jitters – they can even be calmed by the news that an unpopular MP won’t be running for leader.

So is keeping quiet the answer? Are our leaders and analysts talking down our economy and plunging us into recession? Neil Wilson, markets analyst at ETX Capital, thinks not.

“Some suggest that’s exactly what Mark Carney, George Osborne and others have been doing. What’s interesting is that so far there has been no material impact – at least we don’t have the data so far. The Bank of England decided not to cut rates because it had no evidence yet of a slowdown but keeps saying it fully expects to have to ease again to boost demand.

“The fall in the pound could boost overall demand by improving exports and encouraging Britons to turn away from imported goods. It is technically possible but remember any ‘talking down of the UK economy’ is not intended to create a recession – it’s designed to do the exact opposite by flagging where risks exists and how policy can be used to remedy them.”

On the plus side, not everything thinks we’re heading for a really bad recession, just more slowed and negative growth.

Wilson adds: “Most analysts and economists agree the economic outlook has deteriorated. Whether that means an actual recession – two consecutive quarters of contraction – is another matter. A short, fairly mild recession is probably on the cards as we head into 2017 but the UK is well placed to bounce back quickly – this is not a repeat of 2008/09.”

What do you think? Are we talking ourselves into a recession? Have your say using the comments below.

Destroy your debt with 0% balance transfer deals lasting up to 41 months!

Don’t miss these:

Opinion: why Theresa May needs to invest more in Britain

What Theresa May has planned for your money

Brexit: can the UK strike good trade deals with the EU once it leaves the single market?