Forex and Economics Weekly by Lloyds TSB

UK Data Will Keep Focus on Recession Risk

 

The preliminary estimate last week showed that the UK economy contracted by 0.5% in Q3 compared with the previous quarter. This represents the first contraction in output since Q2 1992 and the biggest quarterly fall since Q4 1990. The market consensus view was for a smaller decline of 0.2%.

UK Data Will Keep Focus on Recession Risk

 

The preliminary estimate last week showed that the UK economy contracted by 0.5% in Q3 compared with the previous quarter. This represents the first contraction in output since Q2 1992 and the biggest quarterly fall since Q4 1990. The market consensus view was for a smaller decline of 0.2%. Looking ahead, a further modest fall in Q4 is possible, though so is flat growth. Should the Q4 outcome be negative (published in January), then the UK economy will be in technical recession. Given the latest figures, our weaker case scenario for growth (as published earlier in the year), where the UK economy contracts by up to 1% in 2009, now seems more likely. What does this mean for UK base rates? We forecast a base rate cut of one percentage point to 3.5% – probably a 0.5% cut at the BoE’s 6th November meeting and an additional 0.5% cut – which may take the form of another round of co-ordinated central bank cuts- before year end. Confirmation of a contraction in Q3 US GDP may provide further justification for the Fed to cut its funding rate by up to 0.5% to 1% at this week’s meeting. Moreover, should the German IFO survey and EC confidence indices for October weaken further and the flash CPI October inflation figure fall to around 3.4% as expected, the chance of up to a 0.5% cut in rates to 3.25% by the ECB will significantly increase. The Norwegian central bank is expected to cut interest rates by 0.5% to 4.75% on Wednesday.

 

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