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News : UK Economy Last Updated: Aug 8, 2012 - 4:21 PM


UK GDP growth will be zero in 2012 - - Bank of England
By Finfacts Team
Aug 8, 2012 - 2:21 PM

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The fan chart depicts the probability of various outcomes for GDP growth.  It has been conditioned on the assumption that the stock of purchased assets financed by the issuance of central bank reserves reaches £375bn (bond buying/money printing program) and remains there throughout the forecast period.  To the left of the first vertical dashed line, the distribution reflects the likelihood of revisions to the data over the past;  to the right, it reflects uncertainty over the evolution of GDP growth in the future.  If economic circumstances identical to today’s were to prevail on 100 occasions, the MPC’s best collective judgement is that the mature estimate of GDP growth would lie within the darkest central band on only 10 of those occasions.  The fan chart is constructed so that outturns are also expected to lie within each pair of the lighter green areas on 10 occasions.  In any particular quarter of the forecast period, GDP growth is therefore expected to lie somewhere within the fan on 90 out of 100 occasions.  And on the remaining 10 out of 100 occasions GDP growth can fall anywhere outside the green area of the fan chart.  Over the forecast period, this has been depicted by the light grey background.  In any quarter of the forecast period, the probability mass in each pair of identically coloured bands sums to 10%.  The distribution of that 10% between the bands below and above the central projection varies according to the skew at each quarter, with the distribution given by the ratio of the width of the bands below the central projection to the bands above it.  In Chart 1, the probabilities in the upper bands are the same as those in the lower bands at Years 1, 2 and 3. 

UK GDP (gross domestic product) growth will be zero in 2012, the Bank of England forecast to day.

In its quarterly Inflation Report released Wednesday, the Bank's Monetary Policy Committee says the UK economy will not grow overall in 2012 in spite of an expected return to growth in the second half of the year, ending a double-dip recession that began in the last quarter of 2011.

In its May report, the Bank had forecast growth of 0.8% for the year but GDP fell by 0.3% in the first quarter and 0.7% in the second quarter.

"Unlike the Olympians who have thrilled us over the past fortnight, our economy has not yet reached full fitness. But it is slowly healing," said Mervyn King, the Bank's governor.

Consumer price inflation, currently 2.4%, may drop to the government's official target of 2% by the end of the year and fall below target next year, the report said.

"The labour market has remained surprisingly resilient in recent months. Private sector employment has grown robustly and unemployment has edged downwards. Although welcome news in its own right, the resilience of employment, combined with the weakness of output, means that productivity growth has been unusually low. That continues a recent pattern of both weak output and productivity growth that is difficult to explain. We cannot be sure how persistent that weakness will be, and that is one reason why the Committee has lowered its forecast for growth," King added.

The report says exports fell over the four quarters to 2012 Q1, reflecting both a broad-based slowing of global demand growth and the United Kingdom’s lower share of world trade.  Business surveys suggest that Eurozone GDP contracted in 2012 Q2, with activity subdued in several member countries and declining markedly in some.  Growth has also moderated in the United States and a number of emerging economies.  The sterling exchange rate has appreciated somewhat over the past year, particularly relative to the euro.  If that were to continue it could make it harder for British producers to compete in world markets.

The Bank said that at home, output is estimated to have contracted for three consecutive quarters, such that the level of output in 2012 Q2 is estimated to be lower than in the middle of 2010.  But the scale of that fall probably exaggerates the weakness of underlying demand growth.  Much of the contraction in the first half of this year reflects unusually large declines in measured construction output.  Falls of that magnitude appear out of line with industry surveys and seem unlikely to persist.  Moreover, the additional Jubilee bank holiday is likely to have depressed output markedly in Q2.

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