Poor GDP number shortens odds of full-point UK rate cut
Simon Ward
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The 0.5% decline in GDP in the third quarter understates the scale of recent economic deterioration. A weighted average of monthly series for services and industrial output in July was slightly above its May / June average. The economy appears to have fallen off a cliff in August and September as the financial crisis escalated.
The GDP decline is consistent with an average path derived from the 1974-75, 1979-81 and 1990-91 recessions - see the chart below and the previous post for more details. The average path would involve GDP falling by 2-2.5% between the second quarters of 2008 and 2009, moving sideways over the following year and recovering by 2.5% in the year from the second quarter of 2010. Output would regain its recent peak level only in 2011.
This profile would imply an annual decline in GDP of 1.7% in 2009 followed by growth of just 0.4% in 2010 - significantly weaker than current consensus forecasts of -0.2% and 1.2% respectively (as reported by Consensus Economics Inc).
Incorporating the third-quarter fall into the MPC-ometer confirms the forecast of a cut in official rates of 75-100 basis points on 6 November. The model favours a full-point move if three-month LIBOR is still above 5.75% at the time of the meeting.
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