Sunny boost for economy as GDP rises
FIGURES due this week are expected to show Britain’s economy is on the mend, adding extra shine to a nation already basking in glorious weather and sporting success.
Economists are forecasting gross domestic product (GDP) to have grown by about 0.7 per cent in the second quarter of 2013 – a level rarely seen since the financial crisis.
But some are warning that the weather is a significant distorting factor which means Thursday’s numbers will overstate the strength of the recovery, a fact that will not be lost on new Bank of England (BoE) governor Mark Carney and may give him more room to give businesses a boost.
Philip Shaw, an economist at Investec, said improved weather after a long winter might account for 0.2 per cent or 0.3 per cent of growth and is especially true of the expected rebound in construction.
With the tiny agriculture sector also likely to have received a production boost, Shaw expects all four components of the overall figure to be in the black, something that is rare even in boom times.
But he added: “A rise in GDP on this scale might persuade some that this kills off any chances of the BoE unveiling more quantitative easing [QE], or perhaps other new stimulus measures, over the summer. We disagree.”
As well as the temporary effect from the weather, Shaw points to the fact that the economy is still 3.9 per cent smaller than before the crisis, suggesting an amount of spare capacity that should keep inflation in check.
Analysts had expected Carney’s arrival to signal a new bout of money printing from the BoE, but signs of a strengthening economy meant he kept the programme on hold at his first policy meeting this month. The other eight members of the monetary policy committee (MPC) also chose to sit on their hands until after the bank’s next inflation report, due to be published on 7 August. That is also when the bank has promised to spell out any plans for official forward guidance on its policies.
Michael Saunders, an analyst at Citi, says it is clear that Carney wants to implement guidance, which is already being seen as an alternative policy tool and could prove popular among those policymakers who wish to stimulate the economy but believe QE is either ineffective or fraught with problematic side effects.
“The pros and cons of guidance and QE are not identical, and it is quite possible for MPC members who oppose QE to support guidance,” said Saunders. “QE aims to add stimulus directly whereas guidance provides indirect stimulus through reassurance that policy will not tighten early. The July minutes show MPC members making this distinction, with those MPC members who opposed QE agreeing that there was a need to ‘reinforce the recovery by ensuring that stimulus was not withdrawn prematurely’.”
He expects that rather that issue time-based guidance, the bank will commit to keeping rates on hold until unemployment falls to around 6.5 per cent, something unlikely to happen for another five years.
A commitment from the bank to support the recovery, linked to a measure the public can readily understand, should give businesses and consumers a further confidence boost.
And even if the latest figures overestimate the underlying strength of the recovery, they will still put Britain on course to beat the forecasts for GDP made last winter when the country was on the brink of a triple dip recession.