This is how Goldman Sachs sees the UK economy in the next few months:
We now expect an outright recession in the UK, with two consecutive quarters of -0.1%qoq growth in 2011Q4 and 2012Q1 (where previously we expected marginally positive growth in these quarters). The changes, together with lower growth in 2012Q2, have reduced our 2012 annual GDP forecast from +1.3%yoy to +0.7%yoy.
The revision is mostly due to the crisis that the eurozone seems to be heading ever more determinedly into, which Goldman’s Kevin Daly says will affect trade, confidence and of course bank funding costs — collectively, a -1.5 percentage point effect on their previous outlook, which is “broadly consistent with the 1.6ppt downward revision that we have made to our 2012 UK forecasts since early September (from 2.3% to 0.7%)”.
To further examine his changing outlook for the UK, and what it means for the Bank of England’s quantitative easing programme, Daly has put together what he calls a “current activity indicator”.
The GS UK CAI is available on a timelier basis than official GDP data, and places a large weight on business surveys and labour market indicators. The latter are rarely revised significantly, whereas the official GDP data typically undergo considerable revisions.
An exact breakdown of what goes into the CAI:
And this is what comes out:
Daly believes things should pick up from the second half of 2012, however — partly due to the Olympics, and partly because inflation will fall sharply to below 2.0 per cent which will help real household income rise by 1.0 per cent for the full year, compared to 2011.
And then there’s QE2, part 2. Factoring in the existing gap between BoE rates and the effective private sector lending rate of 3.5 per cent, and adding in the bank funding difficulties alluded to in the Bank of England’s Financial Stability Report last week, Daly comes up with an adjusted Taylor Rule:
Which indicates a further £125bn in asset purchases, he says — taking QE2 to some £200bn.
Uncertainties abound in this formula, says Daly. In short, they are:
- the estimated impact of QE1,
- whether QE2 measures will have the same effect,
- the extent of the euro crisis on which the UK economic forecast is based.
That last one kind of makes everything a crapshoot.
Related links:
Prepare the printing presses – FT Alphaville
BoE charts UK banks’ gloom – FT Alphaville