Risk of double-dip rising, Bank of England to do more - Capital Economics
UK Economics

Risk of double-dip rising, Bank of England to do more

UK Economics Weekly
Written by Ruth Gregory

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)

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

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

Upcoming Events & Data Releases

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

Main Economic & Market Forecasts*

%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