Research Dept. News
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Monthly Report, num 359 - July-August 2012
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European union - United Kingdom
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The UK: purchases of financial assets by the central bank?
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The deterioration of the United Kingdom's economy is confirmed.
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The publication of the breakdown for gross domestic product of the first quarter of the year led to doubts regarding the recovery of economic activity in the United Kingdom. GDP was revised downwards by one tenth of a percentage point to -0.3% quarter-on-quarter, leaving the year-on-year growth rate at -0.1%. The breakdown for this figure indicates that private consumption is slowing down from 0.4% quarter-on-quarter in the previous quarter to 0.1%. The surprise was caused by the rise in public expenditure, at 1.6% quarter-on-quarter. This situation should be reversed over the coming quarters due to the austerity policies implemented by the government.
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One worrying aspect is the drop in gross fixed capital formation of -0.3% quarter-on-quarter. Investment has now been in decline for two consecutive quarters in the United Kingdom. Nonetheless, exports provided a pleasant surprise with an increase of 0.1% quarter-on-quarter, in spite of the strong pound and the decline in growth in the main trading partners of the United Kingdom. However, imports grew by 0.4% quarter-on-quarter.
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Taking a look at the last four quarters, the economy of the United Kingdom has experienced a moderate recession. The fall in GDP reflects not only domestic obstacles (such as fiscal adjustment and the reduction of disposable income for households, among others) but also the impact of the situation in the European Union and the slowdown in the economy at a global level. With regard to the economic sectors, manufacturing and construction are the weakest, while services contributed to growth in the last quarter.
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Some economic indicators provide some hope, such as the sales figures for retail and consumer goods in May which, after a disastrous April, posted growth of 1.4% month-on-month. However, this improvement is unlikely to be sustainable as most leading indicators point in the opposite direction. One good example of this is the purchasing managers' index of manufacturers (PMI) for May, which fell to 45.9 points, below the level of 50 and indicating economic contraction. In fact, if the macroeconomic indicators as a whole maintain their current trend, we would be forced to adjust downwards our growth forecast for GDP for this year, which is currently at 0.6%. Given the seriousness of the economic deterioration, the British government, in combination with the Bank of England, announced plans to create a line of 10 billion pounds sterling to support credit to small and medium-sized firms and households.
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On the other hand, two decisions were taken in the monetary policy meeting of the Bank of England. The first, to keep the official interest rate at 0.5%. Second, five of the nine members voted against a proposal made by the governor of the central bank, Mervyn King, to increase the quantitative easing programme. The minutes recorded that most members believe that more monetary stimulus will be required over the coming months but they also highlighted that they would prefer to wait for the outcome of the legislative elections in France and Greece. All agree that one of the most serious threats to the British economy is the interaction between the uncertainty caused by the European crisis and its impact on the financial markets which, ultimately, could lead to a credit squeeze for firms and families.
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The members of the Monetary Policy Committee will have lots of margin to increase the quantitative easing programme as May's inflation figures reveal that the trend is still downwards. The consumer price index fell by two tenths of a percentage point, totalling 2.8% year-on-year, this being the lowest level in the last two and a half years.
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