On course to contract in Q4

An across-the-board deterioration in the economic data over the last month has left the UK economy on course to contract in the fourth quarter. While the first estimate of GDP revealed that output grew by 0.5% q/q in Q3, this largely reflected one-off factors that depressed output in Q2. Moreover, surveys suggest that the economy contracted in October. Growth could pick up in the final months of the year, but forward-looking indicators, such as new orders and consumer confidence, suggest that this is unlikely. High inflation also looks set to remain a key constraint on activity for a few more months, while the economy will also have to contend with the shockwaves emanating from the rapidly escalating euro-zone debt crisis. As a result, we think that the economy is set to re-enter recession in the fourth quarter and expect output to broadly stagnate in 2012 as a whole.