U.K.’s Disappointing Growth Puts BOE Forecasts in Deep Jeopardy

(Bloomberg) -- The U.K. economy’s poor performance in August means it looks set to fall short of Bank of England forecasts, boosting the likelihood of more monetary stimulus.

Output would have to jump a near-record 8% in September, almost four times as much as the previous month, to meet the BOE prediction of an 18.3% third-quarter expansion. That seems unlikely given new coronavirus restrictions. August proved lackluster even with restraints at their weakest and the government subsidizing meals out.

While officials have already acknowledged the downside risks to their outlook, the implications of a disappointing August may puncture optimism among some officials. Chief Economist Andy Haldane in particular has emphasized that the U.K.’s third-quarter performance was looking promising. It may also reinforce arguments for another wave of stimulus as soon as next month.

Gross domestic product rose 2.1% in the month, less than half the pace forecast by economists and down from 6.4% in July. It’s another sign that the nation risks lagging behind its biggest European peers. Third-quarter figures will be released next month.

Output is now languishing almost 10% lower than before the lockdown, compared with around 5% in France. The U.K. had the biggest contraction among major European economies in the second quarter, as well as one of the world’s worst death rates from the virus.

Swathes of the country are now back under restrictions as cases of coronavirus surge, and the economy faces multiple other threats, meaning making up the remaining shortfall may prove to be a slog. Policy makers say they’ll increase monetary and fiscal stimulus as needed.

“Doubt is growing as to whether the recovery can be sustained into the final quarter of the year,” said Dean Turner, economist at UBS Global Wealth Management. “Sluggish progress is likely to encourage the Bank of England to increase its bond buying program at its November meeting.”

What Bloomberg’s Economists Say

“The U.K. economy experienced a sharper-than-expected slowdown in growth in August. With the outlook having darkened significantly in recent weeks, we expect the Bank of England to ease again before the end of the year by increasing its asset purchase target by 100 billion pounds in November.”

-Dan Hanson. Read his U.K. REACT

Meanwhile companies face tariffs, costs and border disruptions from Jan. 1 unless Britain and the European Union clinch a Brexit trade deal soon. Few think that Chancellor Rishi Sunak’s wage-subsidy replacement announced last month will avert mass job losses as government support is scaled back.

Sunak will announce a new aid program on Friday to help businesses forced to close under new coronavirus restrictions that are likely to be imposed within days. The plans are likely to include paying two-thirds of the wages of workers in companies affected by new rules, which could include shutting bars and restaurants in coronavirus hotspots.

That could derail the recovery from its 20% contraction in the second quarter, the most among major advanced nations. GDP will still be around 3% below its pre-pandemic level at the start of 2022 if private-sector forecasters are correct.

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