More QE on cards to stop 'double dip'

Published on Saturday 14 November 2009 12:09

THE Bank of England may have to pump yet more money into the economy next year to shield it from one of the harshest crackdowns in fiscal policy since the Seventies, according to Deloitte.

The bank's Monetary Policy Committee will be forced to revisit its quantitative easing (QE) programme to prevent a "double dip" recession fuelled by dramatic public spending cuts, Deloitte chief economist Ian Stewart says in his latest forecast.

Stewart, who was previously chief UK economist at Merrill Lynch, says the next government will be forced to tighten fiscal policy by around 5 per cent of GDP between 2010 and 2015.

As a result, many economists are predicting large-scale public sector redundancies and a further slump in consumer confidence next year.

Stewart warned that the MPC will have to continue to prop up growth through QE if it wants to avoid a further relapse.

Delivering his latest economic forecast in Edinburgh, Stewart says: "The first fiscal statement after the general election will be a rather frightening occasion.

"A tighter fiscal policy won't derail economic recovery as long as the Bank of England keeps the tap on. By that I mean keeping interest rates low, but it'll probably mean more QE as well."

Stewart adds: "History shows us that even when the government tightens fiscal policy, you can have a recovery if you have sufficiently loose monetary policy."

Until last month, economists had thought that the bank's QE programme was nearing its end. But the publication of third quarter GDP figures, which showed Britain had failed to exit recession as expected, prompted a further 25bn injection following the MPC's November meeting.

Stewart says that Britain is unlikely to have seen the last of QE and governments here, in Europe and America are likely to continue with extraordinary measures until a sustained recovery can be assured.

City economists are, on average, forecasting 1.1 per cent GDP growth in the UK next year, but many are wary of what measures the next chancellor will have to introduce to reel back Britain's burgeoning budget deficit.

It is estimated that public sector borrowing will average 15 per cent of GDP this year, twice the size of borrowing in the mid-Seventies when Britain was forced to go cap in hand to the International Monetary Fund for a 2.3bn bail-out.

Retailers are particularly cautious about the first half of 2010 with Next chief executive Simon Wolfson recently warning investors not to get "too carried away" with talk of a recovery as the high street chain expects already cautious shoppers to tighten their belts again next year.

However, Stewart says there is cause for optimism. Compared with previous recessions, profits at British companies have held up relatively well, he says.

"One of the anomalies of this recession has been that GDP has collapsed but profits as a share of GDP have held up pretty well. UK corporates have been very good at keeping costs down and driving inventories down. Another aspect of this resilience is that insolvencies haven't risen anywhere near as much as you would expect given the falls in GDP."

Last week the Bank of England surprised the markets by hiking its forecasts for economic growth over the next three years. It expects GDP growth to rise above 4 per cent early in 2011 before stabilising at 3 per cent by the end of 2012. But the forecasts were quickly dismissed as "highly optimistic" by several economists, including Hetal Mehta, senior economic adviser to the influential Ernst & Young ITEM Club.