Surprise slump in UK output raises chance of more QE

 

Worrying signs of a dire October for the economy and a surprise slump for Britain's industrial base raised the pressure on the Bank of England to inject billions more into the UK recovery tomorrow.

The National Institute for Economic and Social Research signalled a sharp slowdown for the economy last month with growth of 0.5 per cent in the quarter to October – half the 1 per cent pace seen between July and September.

The forecasts came after a 1.7 per cent slide in industrial production during September – largely driven by maintenance shutdowns in the oil and gas sector – which was far worse than expected by the City.

Manufacturers increased output by a marginal 0.1 per cent, although this made little impression on a 1.2 per cent downwardly revised slide for the sector in August.

September's industrial production was 2.6 per cent down on a year earlier, marking an 18th month in a row of year-on-year decline according to the Office for National Statistics.

Capital Economics' UK economist Samuel Tombs warned that Britain's economic recovery is "quickly losing momentum again".

He said: "While the MPC [Monetary Policy Committee] may pause QE [quantitative easing] at its meeting later this week, if the economic data remain this weak, it may not be long before the committee has to provide the economy with further stimulus."

The pound dropped a third of a cent to a session low of $1.5963 following the figures, as traders bet the news raised the chances that the MPC will extend its QE – currently standing at £375bn – on Thursday.

Industrial production accounts for 15 per cent of the economy, although the figures can be volatile – as shown by the 20.9 per cent slump in oil and gas extraction over the month.

Deutsche Bank's chief UK economist George Buckley said: "It could have a sizable effect on Q4 [fourth quarter] as the level of output going into the quarter is much lower than had been anticipated.

"Overall manufacturing output was up, but again weaker than expected. This provides more evidence on the fragility of the recovery, and suggests a close MPC vote on Thursday."

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