UK Market

Flagging UK economy raises case for more quantitative easing

The gloomy news from the UK's service sector presents the Bank of England's monetary policy committee with a headache when it meets this week. Should the nine members of the MPC take comfort from the flash estimate of third quarter growth, which showed the economy expanding at 1%? Or should it give greater weight to the three forward-looking surveys of manufacturing, construction and services that paint an altogether darker picture?

Monday's snapshot of services will certainly be taken seriously by the Bank. By virtue of the fact that services account for 75% of national output, it is the most important of the three Purchasing Managers' Indices released at the start of every month. The November reading was the weakest since December 2010, and barely above the level that separates an expanding from a contracting sector.

Taken together, the PMIs suggest that the economy still lacks momentum. Growth in the third quarter would have been around 0.2% without the special factors – the bounceback from June's extra bank holiday and the Olympics – that boosted activity, and on current form growth of 0.1-0.2% is the best that can be expected in the final three months of the year.

The one reason for a sliver of optimism is that orders for the service sector have picked up a bit. That might mean that while firms are struggling now, business conditions are going to get easier over the coming months. The MPC will be aware, though, of three factors that could lead to even more depressed activity over the winter: weak real income growth, the never-ending crisis in the eurozone and the looming fiscal cliff in the US.

As a result, this week's MPC vote is likely to be a close-run thing. Bank rate will remain pegged at 0.5%, where it has been for almost four years, but there will be a split over whether to announce a new round ofquantitative easing, the bond-buying programme designed to increase the money supply. When the third quarter GDP data was released less than a fortnight ago, the City was convinced that the Bank would sit on its hands this month. Today, that decision looks a lot less clearcut and it would be no surprise if the Bank deemed it necessary to inject some fresh stimulus on Thursday into an economy that is struggling to get out of first gear.