Bank of England ¿will slash growth forecast to zero¿, say analysts

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By Dan Atkinson

PUBLISHED: 16:08 EST, 4 August 2012 | UPDATED: 02:55 EST, 5 August 2012

The Bank of England will this week join the ranks of forecasters who have cut their outlook for the British economy, with many analysts expecting the Bank to predict zero growth for 2012.

The shock 0.7 per cent collapse of gross domestic product in the second quarter, coming after a 0.3 per cent decline in the first quarter and mounting fears about performance in the current quarter, seem sure to force the Bank to abandon its existing forecasts, published in May.

The Bank then was looking for 0.5 per cent growth this year and 2.1 per cent next year. Now it is thought that the 2012 forecast will be close to no growth, with the 2013 estimate cut back to about 1.6 per cent.

British economy: It is thought that the Bank of England's 2012 forecast will be close to no growth

British economy: It is thought that the Bank of England's 2012 forecast will be close to no growth

Even this figure would be ominous, being below the two per cent annual growth thought necessary to stave off a rise in unemployment.

‘The May figures did not always appear so over-optimistic,’ said Ross Walker, economist at Royal Bank of Scotland. ‘But the Bank seems to have had a tendency over time to assume official growth numbers will always be revised up, and this has not been the case recently.’

The new growth figures will come in the Bank’s quarterly inflation report, to be published on Wednesday.

How does the current slump compare with previous recessions?

The great recession: How does the current slump compare with previous recessions?

Last week, it announced that the nine members of the Monetary Policy Committee would leave the base rate and its quantitative easing money creation programme unchanged – for now.

What next for rates?

The dire GDP figures (25 July), which showed Britain's recession was worsening and had extended from six months to nine months, merely reinforced the gloom and cemented the chances of a rate cut, writes Andrew Oxlade.

Money markets on 3 August implied rates would be cut from 0.50% to 0.25% in December and then rise back to 0.50% in January 2016. A rise to 0.75% is not forecast until October 2017 with an increase to 1% in November 2018.

That's the most dovish forecast made so far in the financial crisis, and it's a significant shift from three months ago when the predictions for a rise to 0.75% was 'mid-2014' .

The market has only recently priced in that rates would fall before rising. Minutes from the Bank of England monetary policy committee have shown for two months that a rate cut was talked about [Read more on the June MPC discussion].

‘The Bank is going to be knocking down its growth estimates for this year and next,’ said Peter Dixon, strategist at Commerzbank.

Howard Archer, economist with independent forecasting group IHS Global Insight, said: ‘The dreadful second-quarter performance has knocked their forecast off course.

‘To be fair to the Bank, no one saw that one coming, with the Jubilee Bank Holiday being so exacerbated by the impact of the weather on construction and retailing.

‘It all leaves the door open for more quantitative easing, and there is a growing likelihood of a cut in the base rate from its current 0.5 per cent.’

There had been hopes of a strong recovery in the third quarter, but now these are starting to fade.

Last week’s survey of purchasing managers in manufacturing industry in July showed the fastest contraction in activity in more than three years, although this was partly balanced by a somewhat brighter version of the same survey covering purchasing managers in the construction industry.

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