UK growth slows to 0.1% but will that force the Bank of England into QE2?

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The Office of National Statistics yesterday revealed that UK growth was even more minimal in the second quarter of 2011 than previously thought. In the finalised national accounts for Q2, gross domestic product (GDP) growth was revised down from an already-anaemic 0.2% to a paltry 0.1%. In the nine months to June, the UK economy achieved zero growth. Over the same period household spending fell by -0.5%.

Had the GDP data been the only figures yesterday morning Sterling would have come to grief. However, at the same time the services sector purchasing managers' index (PMI) went up by nearly two points to 52.9; the second upside PMI surprise this week and this time it did not go unnoticed by investors, especially as the equivalent figures from Italy, France, Germany, the Eurozone and the US were all lower on the month.

In the end though, investors found it impossible to get too worked up over the data releases when they have the debt/default/recession quandary on the menu. Yesterday the tendency was towards relaxation, helped by a perception that EU governments would do everything necessary to support their banking institutions. Equities rose and while the Australian Dollar and New Zealand Dollar regained a couple of cents against Sterling. 

Today's central bank meetings take centre stage, with the Bank of England announcement at 12pm and the European Central Bank announcement 45 minutes later. The Bank of England meeting is probably more straightforward, with the arguments likely to centre around the growth and inflation trade-off. Although inflation is currently high, it is expected to decline sharply over the next 12-15 months. Meanwhile, downside risks to GDP growth have become more prominent so will there be enough votes in favour of further quantitative easing this month? Considering there was a 9-0 vote last month in favour of keeping rates on hold and no further quantitative easing, it would be a surprise if QE was extended today. If there is no QE, Sterling could rally.

The European Central Bank finds itself in a far trickier spot. Growth is clearly slowing but inflation picked up last month so can the ECB ignore the inflation rise? Probably. And a cut of 0.25% is the expectation but is that adequate to reverse the downside growth risks? Probably not.