Probably no double-dip
We had our second major dose of economic indicators in successive days today, as the Bank of England published its quarterly inflation report. Bundled into any inflation snapshot is a broader view - and forecast - of the economy on the whole, so these reports are always keenly analysed.
BoE governor Mervyn King started by reflecting that the credit environment is still fraught, and that remains the major headwind facing economic growth. "Looking ahead, the UK economy is facing a major rebalancing away from private and public consumption and towards net exports," said King. "Achieving that rebalancing, while confronting those headwinds, is likely to mean a choppy recovery."
We managed GDP growth of over one percent in Q2, and growth is expected to move along at between two and three percent for the foreseeable future - pretty much the long-run average (see chart 1 below).
"But there are clearly risks: business and consumer sentiment have shown signs of softening, measures of financial fragility remain elevated, and there is great uncertainty about the outlook for both the United States and our most important trading partner, the euro area," said King. For this reason, he revealed the forecast is lower than it was in the last quarterly report.
Regarding inflation (see chart 3), King put the consistent above-target figure down to a number of one-off price-level shocks. "The Committee's central view remains that, once the effects of the price-level shocks - including the forthcoming increase in VAT - drop out of the twelve-month comparison, inflation will fall back, probably to below the target, reflecting the influence of spare capacity in the economy," said King.
Our best guess is that this means interest rates will be kept at their current level for a while yet as the BoE reckons inflation's going to sort itself out and the recovery is still too fragile to risk upsetting it.
There was some positive related news: UK unemployment fell by 49,000 in the three months to June - the largest drop for three years. Also, while the US Federal Reserve conceded yesterday that the US recovery has slowed, it reassured markets with a moderate tone and a commitment to keep interest rates where they are for a while yet.
The news isn't so great for the PC sector, however, with JP Morgan semiconductor analyst asserting that PC orders are "falling off a cliff". His isn't the only such assessment and PC-related stocks are being hit as a result.