Economy needs monetary boost

The UK economy got off to a surprisingly strong start in 2013, but not sufficiently strong to rule out more monetary easing, economists say.

A survey of purchasing managers by research group Markit found that service sector activity rose in January, reversing December's fall. And the British Retail Consortium reported that retail sales rose 3 per cent in January, the strongest growth since September. "The mood is lifting a little for customers and retailers" said Helen Dickinson, director-general of the BRC.

"Q1 has gotten off to a half-decent start" said Jens Larsen of RBC Capital Markets. He expects real GDP to grow 0.2 per cent in this quarter, enough to prevent a triple-dip recession.

Economists agree that these numbers will prevent the Bank of England from doing any more quantitative easing soon. But they don't rule out action later this year.

The numbers are, says Blerina Uruci at Barclays Capital, consistent with only "marginal growth." Economists expect real GDP to grow by only 1 per cent this year. And James Knightley at ING Bank says even this feeble expansion could be jeopardised if the euro crisis or fears about US fiscal policy resurface. "We still feel there will be more stimulus to come from the Bank" he says.

There is, though, uncertainty about what form this stimulus could take: Bank Governor-elect Mark Carney might spell out the options to the Treasury select committee on Thursday.

But all the obvious options have drawbacks. The Bank has recently expressed scepticism about whether more quantitative easing would greatly raise demand. It could pledge to keep interest rates low for a long time - as the US Federal Reserve has done - but with short sterling futures pricing in only a quarter-point rise by the end of 2014 this might not make much difference. It could try to talk sterling down, but even if this succeeds, exports don't respond much to exchange rate moves. Or it might try to kick-start bank lending by beefing up the Funding for Lending Scheme. But the fact that firms are still repaying debt suggests the biggest constraint on credit growth might be a lack of demand, not of supply.

And even if a powerful monetary stimulus could be found, the Bank could not deploy it without threatening to push inflation above its two per cent target. And this target can only be changed by the chancellor.

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