‘Fundamental anchors’ are enough to keep the UK out of a double dip

22nd September 2010

The CBI now expects UK GDP to grow by 2% in 2011, not 2.5% as it forecast only in June this year. While it believes the prospect of a return to recession is unlikely, the CBI's statement reveals considerable unease over the impact of government spending cuts and household spending being curtailed going forward due to higher inflation.  

On a brighter note, however, the organisation says it is ‘unlikely' the UK will slip back into recession.

CBI Director-General Richard Lambert says:  "The degree of uncertainty around the outlook remains high, but our view is that the UK's tentative recovery will be sustained, albeit with weaker levels of growth."  

Lambert adds: "The fragile nature of the recovery is why, in the forthcoming spending review, the government must focus its scarce resources on those areas which most galvanise growth, namely infrastructure and capital investment."

Meanwhile, the Bank of England released minutes of its 8-9 September Monetary Policy Committee (MPC) meeting which resulted in rates being kept on hold at 0.5%, with a vote of 8-1.

The minutes reveal some of the nine members are getting more uncomfortable about the growth outlook for the economy although though the MPC's lone hawk, Andrew Sentance, argued again for a hike in rates.

The minutes also indicate that the BoE believes the chances that the economy will need further stimulus through quantitative easing (QE) has gone up. But there is growing concern about the impact of QE.

Azad Zangana, European economist at Schroders says QE in the UK has so far been ‘disappointing', adding: ‘While it has helped a lot to help shore up banks' balance sheet its effects on the real economy have been limited, with lending remaining at very low levels and households continuing to leverage.'  

At the moment though the monetary doves are in the driving seat on both sides of the Atlantic, with the US Federal Reserve yesterday also indicating  that it was prepared to embark on a further bout of quantative easing.

The Fed is concerned about a slowdown in the pace of recovery in the US economy and says, even more forcefully than the BoE, that it stands ready to intervene further through QE to provide support to the faltering US economy.

Economists reactions posted on the New York Times site are mixed with some still fearing a double-dip recession in the US.  Philip Poole, HSBC's head of macreconomic investment strategy, however, continues to believe a double-dip in the US is less likely than continued moderate global growth in which emerging economies significantly outperform the developed world.

"This low grade growth scenario in much of the developed world should keep both policy and market rates there very low for a long time to come and, whether or not we eventually get additional QE, the market is likely to remain awash with liquidity," he says.

Poole says the Fed's latest statement indicates continuing tension between concerns about weakness in US and global activity and commitment to a monetary policy that will keep the market's liquidity ‘comfort blanket' in place.

From the perspective of financial asset prices, the key question for him remains which of these will eventually dominate.

Poole adds that the Fed statement, and, to a lesser extent, dovish sentiment coming from policy makers in Japan and the UK, reinforces his view that the world should remain flooded with liquidity for a long time to come.

"And while it is unlikely to be a smooth process, on balance this liquidity should, I believe, continue to seek out yield and return in markets where fundamental anchors remain strong," he adds.

Leave a Reply

Your email address will not be published. Required fields are marked *