Economy stagnating at best

The last month has brought further confirmation that the recovery has ground to a complete halt. Quarterly GDP growth was revised down from 0.2% to 0.1% in Q2. Even that growth was dependent on rises in government spending and inventories that seem unlikely to be sustained. At least GDP in Q2 was depressed by some one-off factors (e.g. the extra Bank Holiday). The activity surveys also suggested that the economy eked out growth in September. However, the surveys’ average reading for Q3 points to a small drop in GDP, while their forward-looking balances suggest that September’s improvement may be a blip. As a result, GDP growth may be less than 1% in 2011 and could even fall short of our bearish forecast of 1% in 2012.