Economy to contract by 2.5% this year

The data over the last month have made it look much more likely that GDP will fall very sharply this year. The National Accounts revealed that GDP fell in Q3 by 0.6%, worse than the previous estimate of a 0.5% drop. What’s more, the further falls in the CIPS/Markit PMIs suggest that the economy may have contracted by 1% in Q4. We now think that GDP will fall by 2.5% in 2009 and a further 1% in 2010. This, together with the growing threat of deflation, will prompt the MPC to cut interest rates to,or very close to, zero and to pursue more unconventional policies to boost the quantity of money.