The fact that the Bank of England is launching another round of QE shows they are clearly getting very concerned about the economy.
Comparing today’s statement to May’s Inflation Report presents a picture of an institution getting more and more concerned about quite how severe the current slump will prove to be. (Hat tip here to the FT’s Chris Giles on twitter)
The pattern of quarterly growth in 2012 is likely to be affected by a number of one-off factors, including the Queen’s Diamond Jubilee and the Olympics. Looking through those effects, underlying growth is likely to remain subdued in the near term before a gentle increase in households’ real incomes and consumption helps the recovery to gain traction. Stimulus from monetary policy should help to support activity, but continued strains within the euro area, tight credit conditions and the fiscal consolidation are all likely to temper the pace of expansion.
I.e. Growth was likely to be weak in the second half of 2012 but the economy should have at least been heading in the right direction.
UK output has barely grown for a year and a half and is estimated to have fallen in both of the past two quarters. The pace of expansion in most of the United Kingdom’s main export markets also appears to have slowed. Business indicators point to a continuation of that weakness in the near term, both at home and abroad. In spite of the progress made at the latest European Council, concerns remain about the indebtedness and competitiveness of several euro-area economies, and that is weighing on confidence here. The correspondingly weaker outlook for UK output growth means that the margin of economic slack is likely to be greater and more persistent. (my emphasis).
In other words, the downturn is looking to be deeper and longer lasting than they expected only two months ago.
The expansion of QE is therefore to be welcomed as one way of providing some support to the battered economy, but the Government itself remains committed to austerity. Monetary expansion might help offset some of the impact of the government’s own fiscal tightening but it is unlikely to be enough to get the economy growing at a decent pace.
What is really needed now is for the Government to listen to the Bank, realise how weak the economy is and change course.