Investment Line: Has the recession permanently damaged UK GDP?

The Swedish central bank is regarded as one of the more transparent and sensible of its ilk.

While its 25 basis points interest rate hike to 0.75% yesterday was not unexpected, its comments about whether Sweden had suffered a permanent loss of GDP -or an 'output gap'- from two years of economic slowdown raises questions for most developed countries.

The question is crucial because if the monetary authorities genuinely believe their respective economies will never make up that output gap they will be far more likely to push for tighter monetary control sooner rather than later, and probably as soon as annual growth rates are perceived to have reached normal levels.

If on the other hand they think GDP needs to go significantly higher until the output gap created by the global slowdown has been closed, then they will be more inclined to keep rates lower for longer.

Gavekal analyst James Barnes points out that the IMF is already predicting the OECD countries will suffer a permanent loss to GDP numbers and adds that most multi-national corporates are acting in the same way.

What do the central banks think, he asks, and what are the tools available to them as they look to calculate the potential levels of GDP ahead?

Schroder European strategist Azad Zangana says he believes  the output gap for the UK would be smaller than many thought earlier in the year.

'The Office for Budget Responsibility (OBR) said earlier this year there had been a permanent loss of growth to the UK economy which is why we thought in May there would be an MPC member voting for rate rises. We saw that with Andrew Sentance.'

Since May Zangana says the group has held the view that the output gap will be smaller than first thought and that inflationary pressures would return sooner rather than later to the mix.

'We think the Bank of England is being quite stubborn on this and believe there is plenty of capacity left in the system. The OBR revised down their growth forecasts but did not revise down their inflation estimates whereas the BoE revised down both.'