An interest rate cut looks nailed on as Britain’s economy continues to splutter

GDP fell by much more than had been feared – and left the pound taking a tumble, writes James Moore

Recent comments of Bank of England governor Mark Carney have raised expectations of an interest rate cut (AFP/Getty)

It didn’t take long for the pound to find itself in the doghouse after the latest GDP numbers landed. November was much worse than expected, something that’s becoming par for the course in Brexit Britain.

UK plc shrank by 0.3 per cent over the month. So more doom, gloom and disaster? Well, up to a point. The picture was a little more nuanced than the reaction of currency markets would have you believe.

While the 11th month was a miserable, the ninth and the 10th were, it turns out, better than had been feared. Both were revised upwards.

When considering three together, which is important given how volatile the monthly numbers can be, the economy continued with its flatlining, barely scraping into positive territory with growth of 0.1 per cent.

The reason the pound fell out of bed is because, alongside recent dovish comments made by Bank of England governor Mark Carney, the figures raised expectations on the markets that an interest rate cut to 0.5 per cent from the current 0.75 per cent is on the way.

Correctly? Probably.

Those GDP numbers are quite backward-looking. The November one covers a period when uncertainty was at its peak, taking in a good chunk of the general election campaign.

The poll delivered a decisive result, and some have seen that as grounds for optimism. At least the direction of travel is now known.

On the other hand, there’s been precious little seen of that feeding through into the more recent and forward-looking economic data.

The last set of Purchasing Managing Indices, for example, ranged from fairly poor to godawful. The consumer, meanwhile, responded to the election result by staying in bed as the latest retail reporting season has demonstrated. The British Retail Consortium described 2019 as the worst on record.

Oxford Economics does expect the global economy, which has been in a bit of a slough, to start picking up at the end of the first quarter, so there’s that.

But whether the UK is in a position to derive any benefit from that is an open question.

The election result was decisive, but all that means is that one sort of uncertainty has simply been exchanged for another.

Brexit is happening, that much is clear, but what then? Another cliff edge looms in December when the transition period is scheduled to end because of prime minister Boris Johnson’s latest stupid self-imposed deadline. If a trade deal isn’t fixed up by then, Britain will tip over, with the queues at customs, and the drug shortages and, well, you know the drill.

Against that backdrop, it’s no wonder that the next meeting for the Bank’s rate-setting will be a big one, the sort that gets pulses racing among the pointy-headed brigade in the City of London responsible for economic forecasts.

At the moment, the smart money is on the MPC attempting to address the torpid UK picture with a little light monetary stimulus. Whether a quarter-point cut will do much in the way of good, however, is rather open to question. But that’s about as much as the Bank can do and it will probably do it.

Considerably more is riding on Sajid Javid’s forthcoming budget, how much fiscal stimulus the chancellor and his boss are prepared to countenance, and how much they’re prepared to borrow on our behalf to fund it.