Growth data to shape economic sentiment

By ADRIAN LOWERY
Updated: 03:42 EST, 23 October 2009

Will hopes for the end of recession be dashed? That is the question on economy-watchers' lips ahead of growth figures released today.

Weak point: Industrial production figures for August came in weak

Third-quarter gross domestic product (GDP) data - due at 09.30 - is expected to show a return to growth and an end to recession after five quarters of economic contraction.

The average independent forecast - obtained by Reuters from 35 economists - is for a rise of 0.2% in GDP between July and September, after a 0.6% fall for the second quarter.

Economists are pinning their hopes for a return to growth on the services sector, where purchasing managers' surveys have shown increasing activity in recent months.

However, recent data has suggested growth could come in weaker. Retail sales for September yesterday stagnated for the second month running, when expectations were sales to rise by 0.5% as shoppers avoided the VAT increase.

And there was an unexpectedly sharp 2.5% drop in industrial output in August.

The markets will watch the figure keenly, as much for the influence it will have over the Bank of England's November monetary policy meeting as anything else.

Sterling jumped to a one-month high on Wednesday amid signs that the Bank of England's monetary easing may be coming to an end.

Minutes from the MPC's October meeting highlighted the fact that 'developments over the month had been generally positive', pointing to a continuing recovery in the global economy.

A weaker than expected figure today could dash sterling, as it appears to seal the case for the MPC to expand quantitative easing beyond the £175bn already committed.

Bank of England deputy governor Paul Tucker yesterday said that the outlook for the economy remains 'highly uncertain'. Anaemic growth would lead to inflation undershooting its target, he added.

A stronger than expected outcome could see the pound strengthen markedly as the chances of more QE disappear and the likelihood of rates going up sooner rather than later increases.

David Page at Investec is bullish on the economy and sterling, and says the debate is set to shift from whether to provide further QE to questioning when the MPC is set to tighten.

'We find it difficult to see how the committee can construct a forecast which justifies more QE, given the fall in sterling and that inflation has been firmer than expected,' he said. 'Our central case is still for the Bank rate to rise in the first quarter of 2010.'

While a positive figure for GDP and an end to recession would be a filip for UK consumers and the markets, it will reveal little about the medium and long-term outlook for the economy.

Many analysts are worried that a tick-up in GDP in the next two quarters could prove temporary and that the UK could be in for a double-dip recession.

The Ernst & Young Item Club, a respected group of economists, said this week that it sees the UK economy struggling to achieve 1% growth next year and that even with growth in the third quarter it is still too early to declare a recovery.