It will be remarkable if the Bank of England does not respond with more Quantitative Easing. We expect an additional £50 billion next month….
Azad Zangana, European Economist
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Within the details, the construction sector made the biggest negative contribution; shrinking by 3%, while output from the industrial sector was also negative; falling by 0.4%. However, the biggest disappointment was the service sector, which was widely expected to grow by about 0.5% and only managed 0.1% over the quarter.
Commentators will be quick to question these numbers – the construction data in particular. However, the final published numbers from the ONS on construction are much more reasonable than had been feared by economists, so the real disappointment has been the service sector. There is room for revisions to these numbers given that they are early estimates, but we doubt they will be large enough to make this ‘double-dip’ go away.
The ‘double-dip’ recession comes as no surprise to us. We have been forecasting another recession since last November when the eurozone crisis intensified. Indeed, we are forecasting a further fall in UK GDP for the second quarter, which will be caused by the special bank holiday to celebrate the Diamond Jubilee.
The economy slipping back into recession will come as a blow for the Chancellor. The Office for Budgetary Responsibility will now have to revise down its forecast, which will worsen the fiscal numbers further. It’s too early to call for a reversal of government policy, though these latest results do highlight that the economy will not withstand any further acceleration in budget reduction measures. We suspect the Treasury recognises this, and is why the Chancellor chose to prolong the cuts into 2016/17 rather than deepening them in the near-term.
As for the Bank of England (BoE), it will be remarkable if it does not respond with more Quantitative Easing. Some of the members of the Monetary Policy Committee have recently adopted a more hawkish tone, suggesting that they are more worried about inflation. However, the adverse impact this news will have on consumer confidence will be important for growth and inflation over the coming quarters. We expect the BoE to extend its Quantitative Easing programme by an additional £50 billion next month.
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The views and opinions contained herein are those of the Azad Zangana, European Economist and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
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Source: ETFWorld – Schroders
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