Tags: Bank | England | UK | Growth

Bank of England Holds Steady Course as U.K. Stumbles Toward Growth

Thursday, 05 Apr 2012 08:30 AM

 

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The Bank of England held back from giving Britain's fragile recovery an extra boost on Thursday, as the economy appears to have avoided falling into recession despite a shock drop in manufacturing output in the first months of 2012.

The economy has not recovered fully from the 2007-2009 recession that left Britons poorer and vulnerable to the euro zone debt crisis, which fuelled a fall in output at the end of last year and raised fears of a new downturn.

A surprise 1 percent dive in manufacturing output in February, announced earlier on Thursday, showed that the economy was still on shaky ground after a series of more upbeat business surveys had indicated that a modest recovery was on track.

Bank of England Governor Mervyn King has warned of a long and arduous road back to economic health, predicting a bumpy ride for most of 2012 as the dangers from the euro debt crisis linger and events such as an extra public holiday for the Queen's Diamond Jubilee distort the course of the economy.

Even a minor technical recession — defined as two consecutive quarters of falling GDP — would be a blow for finance minister George Osborne, who defended his tough austerity plan aimed at erasing a huge deficit in last month's budget.

At its monthly meeting on Thursday, the central bank's Monetary Policy Committee (MPC) left the total of its asset purchases at 325 billion pounds and kept interest rates at their record low of 0.5 percent, a move that had been unanimously expected by analysts polled by Reuters.

"Since the end of 2011, when many were extremely concerned about an economic meltdown in the euro zone, the short-term outlook has improved," said Scott Corfe, economist at economics consultancy CEBR. "For the U.K. at least, it looks as though a recession this year will be avoided."

The pound, which has risen in recent weeks as the prospects of further monetary easing dwindled, traded lower against the dollar on Thursday as the factory output data weighed.

NO MORE STIMULUS

Most economists believe the BoE will not expand its quantitative easing program this year, and the recent output figures did little to change that view.

"Recent economic data has been more encouraging, and with oil prices high, there's now less certainty around how far and how fast inflation will fall," said Ian McCafferty from the Confederation of British Industry.

The Bank of England, along with the government, is forecasting that lower inflation will bring some relief to consumers and allow more consumption.

But a recent jump in oil prices and rising food costs caused by a lack of rain in parts of England raised fears that inflation will not fall towards the BoE's 2 percent target as fast as policymakers hope.

Economists said Britain should return to growth in the first three months of 2012 as the wider measure of industrial output grew in February thanks to increased energy production. The dominant services sector has also been improving.

Nonetheless, the government predicts growth of just 0.8 percent this year, only a fraction more than in 2011.

In another encouraging sign that some consumers are confident enough to spend more, new car registrations rose by 1.8 percent in March, data showed on Thursday. "Domestic demand for new cars is showing signs of recovery," said the chief executive of car lobby SMMT, Paul Everitt.

BRITONS' WOES

Consumers have taken a hammering from a combination of the government's austerity measures to reduce the budget deficit, rising prices that have outpaced wage growth, and the relatively higher cost of credit from banks compared to previous years.

The Conservative Party, the senior partner in the governing coalition with the Liberal Democrats, has so far defended its lead in opinion polls when it comes to economic policy, despite unrelenting calls for action to boost the economy.

However, a poll showed on Thursday that Prime Minister David Cameron's approval rating has tumbled to its lowest level since he was elected almost two years ago, after two weeks in which policy gaffes and a funding scandal battered the Conservatives.

With the government's hands tied by its promise to erase the budget deficit in order to protect Britain's cherished top-notch credit rating, the onus to boost growth has been firmly on the Bank of England.

A sizable minority of economists still expect more stimulus from the BoE — though not until May at the earliest, when its current asset purchases are complete.

"We have a sneaking suspicion that the Bank of England is not quite yet done on the QE front," said Howard Archer from IHS Global Insight.

"This reflects our belief that the economy is likely to stutter over the coming months in the face of still serious domestic and international headwinds and that a majority of MPC members may feel that a final small helping hand is in order," he said.

The minutes of the policymakers' discussions at this month's meeting will be published on April 18.

By May, rate-setters will have seen the first reading of first-quarter GDP and updated their growth and inflation forecasts.

© 2014 Thomson/Reuters. All rights reserved.

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