It may only be a matter of time before the UK follows its European neighbours into a de facto national lockdown. As a result, there are big downside risks to our already downbeat forecast that GDP won’t rise at all in October, November and December. We think the deteriorating economic outlook will prompt the Bank of England to announce another £100bn of QE at its meeting next Thursday and £150bn more QE in 2021, compared with the consensus forecast that the asset purchase programme will, by the end of this year, be as big as it’s going to get.
We have been warning since early June that a weak economic recovery and the resulting soft outlook for inflation would prompt the Bank of England to loosen policy by more than was widely anticipated. (See here.) And that for the next 6-12 months, the MPC’s primary tool would be more QE, rather than negative interest rates (NIR). (See here.)
We expect the MPC to validate these two calls at its meeting next Thursday, if not at its subsequent meeting on 17th December, by announcing further stimulus in the form of an extra £100bn of QE. (See here.) And we think more QE will be unveiled in 2021, in contrast to the consensus forecast that the asset purchase programme will, by the end of this year, be as big as it’s going to get. (See Chart 1.)
Chart 1: Announced Stock of QE Purchases (£bn) |
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Sources: Bloomberg, Capital Economics |
If anything, we are becoming more confident in these calls for two reasons. First, the latest data suggests that the recovery was faltering even before the latest round of COVID-19 restrictions were imposed. Consumers paid back £0.6bn of credit in September. (See here.) And the CBI’s retail survey suggests the retail recovery went into reverse in October, even though no new restrictions outside of Wales were imposed on the sector. (See Chart 2.)
Second, with the number of new confirmed COVID-19 cases as a share of the population surpassing that in the US and catching up with other countries such as Spain, it may only be a matter of time before the UK follows its European neighbours into a de facto national lockdown. We showed in an Update how different severities and lengths of lockdowns would affect the economy. The key point is that any sort of nationwide lockdown would cause GDP to shrink again, perhaps significantly in Q4. As a result, there is a growing risk that the V-shaped recovery will turn into a W.
Chart 2: CBI Distributive Trades Survey & Retail Sales |
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Source: Refinitiv |
At least any second leg down in GDP would probably be smaller than the first, when the lockdown caused a fall of 25%. Those construction and manufacturing businesses that have social distancing measures in place would probably be encouraged to carry on working, schools may remain open and the ability of many employees to work from home is greater now than it was in April. Even so, there are big downside risks to our already downbeat forecast that GDP won’t rise at all in October, November and December. A contraction in Q4 looks increasingly plausible.
We think that this will prompt the Bank of England do much more. We wouldn’t rule out NIR being used further down the line. The longer the crisis lasts, and the longer policy support is needed, the more innovative the Bank will become. But for the next 6-12 months at least, we think the Bank will shun NIR in favour of more QE. (See here.)
The week ahead
Besides next Thursday’s MPC meeting, we expect the closure of the hospitality sector in a number of UK regions to prompt a downward revision to October’s services PMI (due on Wednesday).
Economic Diary & Forecasts
Date | Country | Release/Indicator/Event | Time (GMT) | Previous* | Consensus* | CE Forecasts* | Data Response | |
Mon 2nd |  | UK | IHS Markit/CIPS Manufacturing PMI (Oct, Final) | (09.30) | 53.3p | 53.3 | 53.3 | – |
| UK | House of Commons returns from recess | – | – | – | – | – | |
Tue 3rd | – | – | No Significant Data Released | – | – | – | – | – |
Wed 4th | | UK | IHS Markit/CIPS Composite PMI (Oct, Final) | (09.30) | 52.9p | 52.9 | 52.8 | – |
| UK | IHS Markit/CIPS Services PMI (Oct, Final) | (09.30) | 52.3p | 52.3 | 52.0 | – | |
Thu 5th | | UK | New Car Registrations (Oct) | (09.00) | (-4.4%) | – | – | – |
| UK | IHS Markit/CIPS Construction PMI (Oct) | (09.30) | 56.8 | 55.0 | 55.0 | – | |
| UK | IHS Markit/CIPS All-Sector PMI (Oct) | (09.30) | 56.6 | – | 53.0 | DR | |
| UK | BoE Monetary Policy Decision (Nov) | (12.00) | +0.10% | +0.10% | +0.10% | DR | |
| UK | BoE Asset Purchase Target (Nov) | (12.00) | £745bn | £845bn | £845bn | DR | |
| UK | BoE Rate Votes (Nov, hike-unchanged-cut) | (12.00) | (0-9-0) | (0-9-0) | (0-9-0) | DR | |
| UK | BoE QE Votes (Nov, reduce-unchanged-increase) | (12.00) | (0-9-0) | – | (0-1-8) | DR | |
Fri 6th | – | – | No Significant Data Released | – | – | – | – | – |
Selected future data releases and events | ||||||||
Tue 10th | | UK | Labour Market (Sep/Oct) | (07.00) | – | – | – | DR |
Thu 12th | | UK | GDP (Q3, q/q(y/y)) | (07.00) | -19.8%(-21.5%) | – | – | DR |
| UK | Monthly GDP (Sep) | (07.00) | +2.1%(-9.3%) | – | – | DR | |
| UK | Service Output (Sep) | (07.00) | +2.4%(-9.5%) | – | – | DR | |
| UK | Industrial Production (Sep) | (07.00) | +0.3%(-6.4%) | – | – | DR | |
| UK | International Trade Balance (Sep) | (07.00) | +£1.4bn | – | – | DR | |
*m/m(y/y) unless otherwise stated Sources: Bloomberg, Capital Economics | ||||||||
%q/q(%y/y) unless stated | Latest | Q1 2020 | Q2 2020 | Q3 2020 | Q4 2020 | 2019 | 2020 | 2021 | 2022 |
GDP | -19.8(-21.5) (Q2) | -2.5(-2.1) | -19.8(-21.5) | +15.6(-9.5) | +1.3(-8.4) | (+1.5) | (-10.4) | (+6.0) | (+4.5) |
CPI inflation | (+0.5) (Sep.) | (+1.7) | (+0.6) | (+0.5) | (+0.5) | (+1.8) | (+0.9) | (+1.4) | (+1.5) |
ILO unemployment rate (%) | 4.5 (Aug) | 4.0 | 4.1 | 4.6 | 5.8 | 3.8 | 4.6 | 6.8 | 6.8 |
Bank rate, end period (%) | 0.10 | 0.10 | 0.10 | 0.10 | 0.10 | 0.75 | 0.10 | 0.10 | 0.10 |
10 yr gilt, end period (%) | 0.24 | 0.39 | 0.18 | 0.25 | 0.15 | 0.83 | 0.15 | 0.15 | 0.15 |
$/£, end period | 1.29 | 1.24 | 1.25 | 1.29 | 1.35 | 1.33 | 1.35 | 1.35 | 1.35 |
Euro/£, end period | 1.11 | 1.14 | 1.14 | 1.14 | 1.13 | 1.18 | 1.13 | 1.13 | 1.13 |
Sources: Capital Economics, Refinitiv | |||||||||
Ruth Gregory, Senior UK Economist, +44 (0)7747 466 451, ruth.gregory@capitaleconomics.com