Britain out of recession in Q3 but more QE coming

LONDON: Britain will escape from recession in the current quarter but that will not stop the Bank of England from beefing up its quantitative easing programme with another 50 billion pounds in November, according to a Reuters poll.

The economy will bounce back to 0.6 percent growth this quarter, boosted by extra working days, better weather and the ticket sales and tourism generated by London's hosting of the Olympic Games, the poll of 50 economists taken this week found.

But it will then only expand between 0.2 and 0.4 percent per quarter through to the end of next year. Those consensus forecasts are little changed from a poll taken last month.

"We'll get a bounceback in the third quarter but the underlying story is still pretty soft. The euro zone is in recession, the U.S. growth story is weakening and Asia is weakening," said James Knightley at ING Financial Markets.

"We are hoping for a gradual improvement, but it is not going to be strong enough to stop the BoE from implementing more stimulus."

There is a 70 percent chance the Bank will add to the 325 billion pounds it has already pumped into the economy through its asset purchase programme, the poll found, with the majority of respondents saying it would act in November.

The Bank will then shut down its printing presses at 425 billion pounds, in forecasts unchanged from a poll taken two weeks ago. The highest forecast predicted 500 billion pounds of QE - around one-third of gross domestic product.

Monetary Policy Committee member David Miles said in a speech on Tuesday he was open-minded about expanded QE. New MPC member Ian McCafferty took a cautious line on the need for more in a parliamentary committee appearance, saying his decision would hinge on a clearer view of the economy's health.

Britain fell back into its second recession in four years at the turn of the year as tough government austerity measures and the euro zone debt crisis stifled the economy.

Gross domestic product (GDP) contracted for a third quarter between April and June, by 0.5 percent, depressed by one-off factors including unusually wet weather and an extra public holiday to mark Queen Elizabeth's 60 years on the throne.

GDP will end the current year 0.3 percent smaller than how it started, knocked by a downturn in its biggest export market, the euro zone. But it will expand 1.2 percent in 2013, according to the median forecast, which slipped for a third month.

Data on Wednesday showed the number of Britons claiming unemployment benefit unexpectedly fell in August by the largest amount since June 2010 as companies created new jobs. That raised some hopes that a stabilising labour market will help pave the way for an economic recovery.

However, hopes the euro zone economy will improve this year have ebbed away and economists polled by Reuters now expect a modest return to growth in 2013, helped by the region's financial firewalls coming into force.

Odds are mounting that the Federal Reserve will take action as soon as Thursday to energise a U.S. economy that is struggling to gain momentum in the face of a lacklustre labour market there as well as an uncertain outlook for fiscal policy.

Economists lowered their forecasts for third-quarter U.S. growth to an annualised 1.7 percent at the same time as they ratcheted up the odds of a third round of bond buying from the Fed to 65 percent.

LOOSE HANDS

The BoE's hands have been somewhat tied by inflation running well above its 2 percent target since late 2009. But the poll predicted inflation would fall to target at the start of next year and hover around there through to at least end-March 2014.

The central bank cut rates to a record low of 0.5 percent back in March 2009. Median forecasts in the poll do not forecast any rate change until April of 2014 at the earliest.

Until recently, the Monetary Policy Committee appeared to rule out cutting the Bank Rate further due to concerns that any further reduction would reduce banks' margins and prove counterproductive if it discouraged lending.

But MPC member Martin Weale said last month he would choose an interest rate cut over more QE, provided it did not result in some banks reducing lending. However, he added he did not see a case for further monetary stimulus "at the moment".

"Further easing in monetary policy is likely to be necessary when the existing QE programme runs out in November," said Kevin Daly at Goldman Sachs, one of the 10 out of 64 economists who see a rate cut by next March.

"Thereafter, we expect policy to remain unchanged for the foreseeable future, although we view the risks next year as being skewed towards further easing," said Daly.