Despite the British economy showing signs of recovery after contracting in the fourth quarter, the Bank of England is likely to engage in additional quantitative easing as inflation is currently forecast to undershoot its target, Vicky Redwood, chief UK economist at Capital Economics, said in a note last week.
The economist assessed that with January's positive purchasing managers' index (PMI) data indicating a pick-up in the British economy, the central bank may now increase the size of its quantitative easing by only GBP50 billion rather than a GBP75 billion increase.
Data compiled by Markit Economics showed that the PMI for the service sector rose to a ten-month high of 56 in January from 54 in December. The data was consistent with quarterly growth in the services sector output of about 0.8 percent.
At the same time, the manufacturing PMI showed improvement in the past couple of months, while the relevant indicator for the construction sector declined in January.
Capital Economics observed that unlike these surveys, a weighted average of which is consistent with quarterly GDP growth of around 0.7 percent, other indicators such as the Bank of England's agents' scores revealed disappointing results. Also, the CBI distributive trades survey showed that retail sales fell back in January after a bounce in the previous month.
Nonetheless, the U.K. economy is still expected to expand in the first quarter and at least temporarily avoid a technical recession, the firm said. Redwood warned that the recent improvement in economic conditions is unlikely to be long-lasting as a temporary pick-up in activity was observed globally, owing mainly to easing fears about the eurozone situation.
Moreover, the effects of the knock-on effects of the recent slowdown in the euro-zone economy are yet to have their full impact on the British Economy, the economist added.
For comments and feedback: editorial@rttnews.com