Sentance Says BOE Staff See ‘Small’ Drop in Second-Quarter GDP

By Jennifer Ryan, Svenja O’Donnell and Elliott Gotkine

July 24 (Bloomberg) -- Bank of England policy maker Andrew Sentance said the bank’s economists anticipate data today to show a “small” drop in U.K. second-quarter gross domestic product as the recession nears its end.

The contraction will be “much less than we saw in the first quarter” and will precede “evidence of positive growth in the second half of the year,” Sentance said in an interview yesterday in London.

GDP figures due at 9:30 a.m. in London will probably show a 0.3 percent decline from the first three months of 2009, the least in a year, the median forecast of 32 economists in a Bloomberg News survey shows. Former policy maker David Blanchflower told Bloomberg Television the drop may be as big as 0.4 percent and may be revised to show a bigger contraction.

Signs that the slump is easing have prompted economists at Barclays Capital and Credit Suisse AG to predict the bank will pause its 125 billion-pound ($206 billion) asset-purchase program. Bank of England Deputy Governor Charles Bean said this week that the economy, which contracted 2.4 percent in the first quarter, may now have stopped shrinking.

Sentance said yesterday that policy makers may shift the bond-buying plan to a “watching” stance if new quarterly growth and inflation forecasts published next month show a recovery may be in train.

“Even if we decided not to do any more in August, there’s still the option of returning to this policy instrument in the future,” Sentance said in an interview. The question at the Aug. 6 meeting will be “whether we’re now going to move into a phase where we’re watching and observing what happens in the economy.”

Recovery Evidence

Evidence is mounting that the global economy is recovering from recession. Canada’s central bank said yesterday that the nation’s slump is ending this quarter, while Federal Reserve Chairman Ben S. Bernanke said this week that the worst housing slump eight decades appears to be moderating.

Sentance said it is difficult to predict exactly when the economy will start growing again.

“There are negative drags, in particular problems in the banking sector,” he said.

Blanchflower, in an interview recorded yesterday, said any economic recovery will be “pretty anemic, pretty slow for a year or two.” He said the bank must keep expanding its asset- purchase program, and should consider spending as much as 300 billion pounds in newly printed money. That’s twice as much as the current total authorized by the government.

‘Early Days’

“It’s very early days to say that you know the endgame is even in sight,” Blanchflower said, speaking from Dartmouth College in Hanover, New Hampshire, where he is professor of economics. “My worry is that the tightening comes too soon and people kill off any recovery that’s coming.”

Withdrawing stimulus prematurely, either by unwinding the bond-purchase program or by raising the key interest rate from the current record low of 0.5 percent, risks pushing unemployment higher, Blanchflower said. The International Labour Organization measure of joblessness may rise by a further 1 million people to reach 3.4 million, he said.

To contact the reporters on this story: Jennifer Ryan in London at Jryan13@bloomberg.net; Svenja O’Donnell in London at sodonnell@bloomberg.net; Elliott Gotkine in London at egotkine@bloomberg.net.