The pound continued to slide back after an unexpected decline in UK GDP for the three months to September 2010 from 0.8% to 0.7% increasing concerns that when austerity measures kick in next year UK economic growth may start to slip back and the UK may yet face the prospect of a so called ‘double dip’ recession.
With retailers this week warning that the current spell of cold weather could affect sales figures before the expected VAT rate hike on January 1st from 17.5% to 20%, there are fears that the growth figures for the three months to December 2010 could also undershoot and fall below expectations. There was, however, a silver lining as business investment grew by nearly double the expected figure, suggesting that businesses are starting to feel a little more confident about the future.
The pound has weakened against the euro, dollar and the resurgent Swiss franc, hitting fresh all time lows against the Swiss currency while also touching 3 month lows against the US dollar. It hasn’t been helped by comments from MPC member Paul Fisher overnight. Mr Fisher suggested that the UK could fall back into negative growth next year.
There were no surprises from the Bank of England minutes. Andrew Sentance was again the lone voice on the committee calling for an increase in the Bank’s key lending rate as a means of reining in inflation, but the MPC concluded that “the accumulation of news over recent months had probably shifted the balance of risks to inflation in the medium term upwards.” Sentance has voted for a rate rise for seven months in succession, during which time the UK annual inflation rate has remained well above the Bank of England’s target level of 2%. In November, the inflation rate rose to 3.3%, and concerns were voiced at the December meeting of the MPC meeting that an increasing number of householders are becoming more pessimistic about inflation trends, though businesses and financial markets remain sanguine about the outlook for inflation. While Sentance’s call for a rate rise was expected, so was the vote by Adam Posen for a £50 billion increase in the Bank of England’s £200 billion quantitative easing (QE) programme. Posen and Sentance have been at loggerheads for some months over the threat posed by inflation, with Posen saying last week that the Bank of England’s policy makers should not overreact to the upward trend in the inflation rate, even though next month’s hike in the rate of value added tax (VAT) is likely to stoke inflation fears some more.
The Office for National Statistics (ONS) reported that the UK economy grew by a less than expected figure of 0.7% in the third quarter raising big question marks about the strength of the economic recovery in the UK. Estimates for the previous quarter, for the three months to June also saw growth estimates slashed from 1.2% to 1.1%. “We do not think the slowdown in economic activity in 2011 will be sufficient to push the Bank of England into more quantitative easing, given persistently sticky, above-target consumer price inflation,” said Howard Archer, chief UK economist at IHS Global Insight.
Despite reports that China was ready to buy up to €5 billion worth of Portuguese debt in an attempt to make good on their pledge earlier this week to help EU countries with sovereign debt issues, the euro continued to slide on these very fears as yield spreads continue to widen. To have any discernible effect China will have to buy a lot more than €5 billion if they expect to have any effect on the negative sentiment surrounding Europe at this point in time. The euro hit fresh all time lows against the Swiss franc as capital continued to flow into the safe haven of the Swiss franc.
US GDP for the three months to September also disappointed despite being revised up by less than expected coming in at 2.6% against expectations of 2.8% but up from the previous 2.5% figure. The world’s biggest economy is now seen as having expanded by 2.6% on an annualised basis in the third quarter, up from a previous estimate of 2.5%. That is still less than the 2.7% annualised growth seen in Britain, itself a downward revision from a previous estimate of 2.8%. The increased US growth estimate was also lower than expectations of about 2.8%.
Data so far suggests that growth has remained strong and is likely to continue doing so, particularly after president Obama agreed a compromise with Republicans on the continuation of the Bush era cuts. The estimate for US economic growth in the third quarter has been revised up, in contrast to the downward revision in Britain earlier in the day.
Commentary by Tony Redondo
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