AMERICA MAY SAIL ON THE QE3 THIS FALL
WE HAD a first look at UK and US second quarter GDP numbers last week. The US was a shocker, coming in at 1.3 per cent on expectations of 1.7 per cent. Worse than that, the first quarter of 2011 and the fourth quarter of last year were both revised down sharply. This means the US economy was slowing even before the Japanese earthquake and tsunami. For the UK, quarter-on-quarter growth was virtually non-existent, and the depressing sub-text was that we’ve only managed to clock up a 0.2 per cent increase in GDP over the last nine months. With base rates still at their all-time low at 0.5 per cent and with the vast bulk of public spending cuts still to be implemented, the outlook for UK growth doesn’t look good.
The markets and ratings agencies believe that the UK government remains committed to controlling public spending. This should keep a lid on the budget deficit and help to keep borrowing costs down. The yield on 10-year gilts dropped below 3 per cent last week, paying investors less than comparable US Treasuries, despite elevated headline UK inflation levels. But while the government can take some credit, falling gilt yields also suggest that investors expect tepid growth for some time to come. Gilts also outperformed US Treasuries as investors became increasingly rattled by the inability of the White House and Congress to reach a deal on the US debt ceiling.
There is renewed speculation that the Monetary Policy Committee (MPC) may launch another round of quantitative easing. Many believe that this would help mitigate the current economic slowdown and offset the chancellor’s fiscal measures. The last set of MPC minutes suggested that the MPC’s interest in further asset purchases has cooled recently, so events this week will be watched closely. The MPC announces its rate decision on Thursday and will provide a fuller insight to its thinking when the quarterly inflation report is released on 10 August.
The speculation over if, or more likely, when, the Federal Reserve launches a third round of quantitative easing in the US has died down recently. The US and European debt crises have helped to drive it off the agenda for now. But given last week’s GDP numbers, the chance of additional monetary stimulus from both the Fed and the Bank of England is likely to be a hot topic in the third quarter.