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Week Ahead: Mervyn King to cut optimistic forecasts
Our preview of the main financial events in the week ahead.
The Bank of England is likely to cut its economic growth forecasts next week, alongside its outlook for inflation, raising expectations that markets will be handed billions more in financial aid.
The Bank’s previous forecasts, made in May, have proved over-optimistic, having been reliant on more ‘orderly’ progress from European policymakers, as well as improvements in bank lending.
The Bank of England forecast growth of around 0.7% for 2012. After the economy contracted by 0.7% in the second quarter – according to the often-disputed ONS figures – and as the eurozone crisis drags on almost all other economists expect much worse than Mervyn King’s prediction. The International Monetary Fund forecasts growth of 0.2%, while think tank Niesr now expects a full-year contraction of 0.5%. The average City economist expects no growth at all this year.
Latest City GDP forecasts: Click to enlarge
The coming Wednesday’s inflation report, the quarterly publication in which the Bank updates its economic forecasts – and which is accompanied by comments from governor King – provides signals for markets and economists as to the future direction of policy.
The Bank’s monetary policy committee has just voted to maintain its quantitative easing bond-buying programme at £375 billion, as it studies the impact of bond purchases that will last to November, but the worsening economy means more cash could be forthcoming, even amid doubts as to its benefits for the real economy. It remains to be seen how successful the Bank’s Funding for Lending scheme, which only started on Wednesday, will be.
The inflation report comes alongside a quartet of UK economic data releases, including industrial production and retail sales numbers on Tuesday, external trade figures on Thursday and factory gate (PPI) inflation on Friday.
Worst over for China?
Away from UK domestic concerns, China will likely be the focus of investors next week as it dumps its usual monthly batch of data on Thursday.
Since leaving the years of double-digit growth behind it, the Chinese economy has been a source of constant worry in the global economy, with a recent slowdown in activity prompting action from the authorities, including two interest rate cuts in as many months. A fall in inflation and improvement in industrial production in Thursday’s numbers could signal the beginning of improvement in the world’s fastest-growing major economy. Though as economists at ING Bank note, it would take very strong data to reduce concerns about the pace of China’s slowdown. And besides, if the data is bad, markets will take that as a signal that the People’s Bank will have to provide some stimulus.
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