Market view: BoE will inject extra £50bn QE
Economics warn that today’s GDP upward revision brings “very little good news” and the UK economy remains in “very unstable territory”.
Second quarter gross domestic product growth has been revised upwards from -0.7 per cent to -0.5 per cent, the Office for National Statistics has revealed.
Rob Harbron, economist for the Centre for Economics and Business Research, said that today’s revision “brings little good news”.
He highlighted that, as expected, a decline in the construction sector was upwardly revised by a significant amount, while production also shrank by less than first thought.
He said: “Looking within the headline figure shows a continuation of the squeeze on consumers, as household consumption fell at a quarterly rate of 0.4 per cent. Consumer spending has now been falling for five out of the past six quarters, with just one quarter of positive growth at the end of 2011.
“This takes the level of spending to 6.3 per cent below its highest level at the end of 2007. With household spending comprising just over 60 per cent of GDP, low consumer confidence and weak earnings growth continue to hold back the UK economy.”
Mr Harbron also highlighted that business confidence has been falling back in recent months as the eurozone economic crisis is unresolved and the outlook remains uncertain.
He said: “This has contributed to lower business investment, which fell at a quarter-on-quarter rate of 1.5 per cent in Q2, the largest quarterly fall since the start of 2011. As investment is often a key driver of recovery, these latest data make disappointing reading.”
Mr Harbron warned that the UK economy remains in “very unstable territory”.
He said: “Weak economy conditions are likely to prevail for some time and growth for Q3 is forecast to be only marginal at best. As a result, calls for the further use of stimulus tools are likely to grow louder. We expect the Bank of England to provide £50bn more quantitative easing after their current round of asset purchases has been completed.”
Vicky Redwood, chief UK economist at Capital Economics, added that the extra bank holiday for the Queen’s Jubilee, probably knocked about 0.5 per cent off GDP.
She said: “But even so, underlying output is just stagnating. What’s more, the spending breakdown shows a strong contribution to growth in Q2 from stockbuilding (an unsustainable source of strength).
“Consumer spending and investment both fell and net trade knocked a full 1 percentage point off quarterly growth. Of course, the GDP figures may in the future be revised up further. Nonetheless, given the drags from the fiscal squeeze, eurozone crisis and high domestic debt levels, we still doubt that a strong recovery lies ahead.”