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Overall economic prospects fell to a 3-year low, while trading prospects plunged. Average domestic prices declined sharply, but margins remained steady.
The survey results suggest a 3-in-4 probability of a recession, with the likelihood of a small quarterly fall in Q4 2011 GDP and a larger contraction in Q1 2012.
Trading prospects fell in all sectors and regions. The services sector recorded a particularly sharp decline, while the Midlands & Wales is the weakest region.
Unhappy New Year
Economic and Trading Prospects
Economic prospects took another turn for the worst in the last survey of 2011 and the results indicate that the economy will almost certainly begin the new year with a contraction. The net balance for general economic prospects fell for a third consecutive month, by 3 points to -23 (30% more positive and 53% less positive). Although the monthly decline was the smallest in three months, it nevertheless leaves the net balance at a 3-year low. As this indicator leads quarterly GDP growth by 3-4 months, it suggests that economic activity will progressively weaken during the first quarter and the start of the second quarter of 2012 – see Chart 1.
Of equal concern, the net balance for companies’ own trading prospects fell sharply in December, by 14 points to 17 (31% more positive and 14% less positive), driven mainly by falling optimism rather than greater pessimism. This indicator is a better coincident signal of economic activity and suggests that growth is currently falling sharply.
Taking both net balances together, the survey – via an econometric model – suggests that there will be a small contraction in quarterly GDP in Q4 2011 of about -0.1% and a somewhat larger -0.4% decline in the first quarter of 2012, see Chart 2. From a probabilistic standpoint, our probit model in Chart 3 shows that the likelihood of recession has now risen to 74%, up sharply from 44% last month and 25% in the month before.
Employment, prices and margins
Prospects for staff levels and average domestic prices have fallen significantly in the past month. The net balance for staff levels fell 7 points to 9, with the proportion of businesses expecting to add to payrolls falling to 17% from 22% and the proportion cutting back on staff rising to 8% from 6%. The more challenging economic environment means that firms are less willing to raise prices. The net balance for average domestic prices fell 13 points to -1, with the proportion of companies raising prices falling to 14% from 22% and the proportion cutting prices rising to 15% from 10%. Despite lower price inflation, profit margins were less weak than the previous month, suggesting that costs have fallen. Chart 4 shows the recent trends.
Sector and region
For the second consecutive month, services was the weakest sector, suggesting that the impact of the euro sovereign debt crisis has spread from the initial impact on manufacturing, see Chart 5. The net balance for trading prospects in services plummeted 19 points to 8, while sentiment fell by a smaller degree in other sectors, with net balances for retail at 23 and for the industrial sector at 25.
The regional picture shows broad-based declines, with the Midlands & Wales the weakest region with a net balance for trading prospects at 10, compared with 18 in the North & Scotland and 24 in the South, see Chart 6.
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