End of recession boosts QE critics

Ben Southwood
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THE BANK of England’s next round of money printing could be put on hold, analysts said yesterday, after new GDP figures showed the UK’s economy grew well above expectations in the third quarter.

GDP grew by one per cent in the third quarter, its fastest quarterly growth rate for five years, data from the Office for National Statistics (ONS) revealed yesterday, well above consensus estimates of 0.6 per cent growth.

And the unexpectedly high rise could affect the Bank of England’s decision on whether or not to expand its quantitative easing programme when the last tranche of asset purchases comes to an end in November – even though most economists still believe the UK faces a bumpy ride.

“The GDP result is consistent with my forecast that the economy would regain momentum during the course of 2012 in lagged response to faster real money supply growth since late 2011,” said Henderson’s Simon Ward, a critic of ultra-loose monetary policy in the UK. “This [also] supports the forecast that the MPC will pass on more QE at its 8 November meeting, barring external calamities.”

And RBS’s Ross Walker put the chance of another round of QE in November now at just 40 per cent, down from 70 per cent only last week.

“Before the release of the monetary policy committee (MPC) minutes, the chance of a new bout of QE was 70 per cent,” Walker told City A.M.

“After the minutes…the probability of new purchases was 60 per cent. Then Sir Mervyn’s speech [on Wednesday], which was equivocal and even-handed on QE despite his reputation as an über-dove, brought the chance down to 50 per cent,” Walker said. “So the decision was on a knife edge going into the GDP release.”

Other analysts agreed that the surprisingly good GDP numbers could affect the MPC’s decision.

“Combined with expected rises in inflation due to climbing energy bills and the near-tripling in tuition fees, the unexpectedly high growth could contribute to a soul-searching debate amongst the MPC,” Investec’s Philip Shaw told City A.M.

“Sir Mervyn this week suggested the Bank would have to think long and hard before undertaking further QE,” said Charles Davis of the Centre for Economics and Business Research. “In the short term the GDP data undermine the case for more QE,” – yet he added that the UK’s economic fundamentals should not rule out QE entirely.

Though the headline number revealed growth at a pace not seen since the height of the pre-crisis boom, analysts were quick to play the figures down, drawing attention to the abundance of one-off factors that may have contributed.

The ONS estimated a 0.2 percentage point boost to growth from counting all Olympic ticket sales within the

period. But a bigger factor, according to analyst estimates, was the bounce-back from the extra bank holiday held for the Queen’s Jubilee, thought to be worth about half of the overall one per cent growth.

Even after these two one-off factors, the underlying picture was of around 0.3 per cent growth, a bright statistic, especially since commentators had predicted decline.

Still, analysts said the better than expected growth had little effect on their overall projections, and many predicted a return to decline in the fourth quarter leading to a flat 2012 as a whole.

“The growth doesn’t materially change our forecasts,” said Item Club economist Andrew Goodwin. “The UK faces a slow grind towards recovery.”

Analysts still expect 2013 to see sluggish growth, before a return to trend growth in 2014 at the very least.