String of bad news hits hopes of UK recovery

Dire figures on trade and manufacturing raises prospects of more quantitative easing

Hopes that the UK economy will bounce back strongly in 2012 have been dealt a series of hammer blows.

The manufacturing sector output shrank 1.1 per cent in August – twice the rate of contraction than has been predicted by analysts.

Car-making led the downwards dive, with output falling by 4.5 per cent, due, it seems, to manufacturers having a longer summer closure than normal. Overall, industrial production, including such key industries as oil, gas and mining, fell by 0.5 per cent in the month.

And the bad news did not stop there for the Chancellor, George Osborne, and the Coalition Government as the Office for National Statistics revealed that the UK trade gap in goods with the rest of the world shot up from £2.5bn to £9.8bn in August.

Exports fell 4 per cent during August compared with a 2.5 per cent rise in imports. The UK's overall trade deficit stood at £4.2bn over the month – the second-highest on record.

John Zhu, an economist at HSBC, warned that this has potentially worrying implications for growth and employment: "The fall in exports was broad based, further evidence of a global slowdown in trade. If overseas demand continues to fall, manufacturers may yet cut output and employment in the months ahead."

Paul Fisher, a member of the Bank of England's rate-setting Monetary Policy Committee, admitted in a radio interview that the economy is likely to be "basically flat" this year. This follows recent remarks from Mr Fisher that the UK was probably out of recession.

But his comments chime with the latest forecasts that although the UK may well emerge from technical recession in the third quarter, it could well contract again in the run up to Christmas or early 2013.

The National Institute of Economic and Social Research (NIESR) is the latest to say such a scenario is possible. It said due to one-off, "special events", such as the Olympics and the extra working day following the rejigging of bank holidays around the Diamond Jubilee, the UK economy will grow by 0.8 per cent in the third quarter.

However, the NIESR added that it expected economic growth to be "at a significantly slower pace in the coming quarters" and that the "period of [economic] depression was likely to continue for some time".

This follows hot on the heels of the International Monetary Fund downgrading UK growth, predicting a 0.4 per cent contraction this year and just 1.1 per cent growth in 2013. Significantly, out of all the major world economies the UK was downgraded the most by the IMF.

Such downbeat forecasts and the woeful industrial numbers will strengthen the hand of those at the Bank of England who would like a further round of quantitative easing.

Howard Archer, the chief economist at IHS Global Insight, said: "With the recovery looking feeble and fragile, we expect the Monetary Policy Committee to decide to give the economy a further helping hand in November, most likely in the form of a further £50bn of quantitative easing."

However, Mr Archer did not expect another cut in interest rates which stand at a historically low 0.5 per cent as it may hurt savers and erode the balance sheets of the high street banks.