UK economy: Flat, floating or falling

  • 12 January 2012
  • From the section Business
  • comments

I'm going to stick my neck out and make a forecast about next week's first estimate for growth in the final quarter of 2011. I confidently predict it will be a small number, and it will either have a "plus" sign in front of it or a "negative".

You might not think that last bit very helpful. But when you're talking about the GDP figures for a £1.4 trillion economy, whether the ONS thinks that Britain's national output is slightly larger than it was before, or slightly smaller, is less important when the basic reality is that the economy is not doing very much at all.

Today's industrial production figures for November were worse than expected, and more downbeat than the latest private business surveys. Overall, industrial production in November was 0.6% down on the month - partly, once again, due to sharp falls in the energy sector. The 0.7% decline for October was also revised to 1%.

The figures suggest that UK industrial output in November was 3.5% down on the start of 2011 and 12.5% lower than it was before the crisis.

This part of the economy only accounts for about a sixth of national output - so these figures don't necessarily suggest the GDP figure will be negative. Service sector data has been stronger, though hardly rosy, as Britain's leading supermarket chains can attest. Today's figures do not help.

As expected, the MPC stood pat today. But the betting has to be now that it will anounce further quantitative easing next month, as the current round of asset purchases comes to an end.

Depending on who you talk to, anything from £50bn to £150bn in QE could be in store for 2012 - in addition to the £275bn already in the system. But there is surely a limit to how quickly the Bank can make purchases on this scale without seriously distorting the day-to-day functioning and liquidity of the market for government bonds, especially if it sticks to buying only traditional (non-index-linked) gilts.

How fast inflation falls - and how far QE can continue to expand - are shaping up to be two of the Bank's thorniest questions for 2012.