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5 "Tells" that the Stock Markets Are About to Reverse

Bank of England Quarterly Inflation Report, UK GDP Revised Lower

Economics / Recession 2008 - 2010 May 13, 2009 - 12:23 AM GMT

By: Nadeem_Walayat

Economics

Best Financial Markets Analysis ArticleThe Bank of England in its quarterly inflation report to be published later today is expected to revise its UK GDP forecast lower following the first quarter crash of -1.9%. The Banks forecast of barely 3 months ago is for UK GDP to fall by -3.4% for 2009, this is expected to be revised to -4.1% which would bring the Bank of England inline with the IMF's forecast for GDP contraction which itself is a revision of just a few weeks ago from -3%, against my own forecast for UK GDP contraction for 2009 of -4.75% (see below). The BoE will also revise growth lower for next year which will probably be in the region of +1.5%.


On the inflation front, the BoE's existing forecast is for CPI inflation of 0.7% by the end of this year. However despite RPI deflation of -0.4% for March, CPI at 2.9% is remaining stubbornly high despite the crash of the UK economy, my own forecast as of December 2008 is for UK inflation to bottom by mid 2009 and enter an upward trend as illustrated by the below graph.

Budget Deficit and Quantitative Easing

The Bank of England has already printed £125 billion of money so as to buy mainly government bonds in response to the huge budget deficit that the Labour government will rack up by the end of this year that projects to £175 billion which is up from £38 billion in November. The outlook for subsequent years also remains for bleak with deficits expected to continue for many years as Alistair Darlings own forecast for government net borrowing over the next 4 years has grown from a deficit of £120 billion in November 2008 to £608 billion as of the budget, which is still significantly below my forecast total of £735 billion and therefore the expectation remains for further revisions to the upside over the coming years. This confirms my view that the Bank of England will continue printing money into year end where we could see the total eclipse £400 billion so as to prevent a Government Bond auction failure that would trigger a sharp drop in sterling. Also with little sign that the bankrupt banks are willing to lend the money that has been loaned to the banks onto businesses and individuals. However don't expect the Governor of the Bank of England to give anything away today as any words of money printing on anywhere near the scale of £400 billion will be extremely bearish for sterling.

UK Recession Forecast

Total GDP contraction to date now stands at -4% on a quarter to quarter basis, which is against my forecast for -6.3%, which strongly suggests that GDP contraction during the 2nd and 3rd quarters for 2009 'should' moderate i.e. we are unlikely to see another figure as bad as 1st Q -1.9%, more probably the 2nd quarter GDP is likely to range between -1% to -1.2%. Whilst a bounce back in the economy is expected going into 2010, however the tax hikes and spending cuts will in all likelihood trigger a double dip recession during 2011 to 2012, instead of the mini-boom growth of 3.5% forecast by the Labour government. What this means is that there will be a major shortfall in tax revenues and therefore a continuing budget deficits and hence deeper public spending cuts and therefore continuing pressure on the housing market into at least 2012 as clearly unemployment rising to 3 million and falling incomes is going to continue to bare down on house prices despite the falls to date.

By Nadeem Walayat
http://www.marketoracle.co.uk

Copyright © 2005-09 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on the housing market and interest rates. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 250 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

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