LONDON (MNI) – Analysts’ median forecast is that UK growth will
have posted a small contraction in Q2, of 0.2% on the quarter, but there
are clear risks that the data, out Wednesday, will show a more
substantial fall.

MNI’s analysts survey had a clear downside skew, with the mean
forecast for a 0.3% fall on the quarter and the most optimistic
prediction showing a 0.1% fall on the quarter while the most pessimistic
shows a 0.5% drop. Back in May, the Bank of England’s implied forecast
was for a 0.2% drop but the economy has turned out weaker than the
central bank had expected.

In its May Inflation Report, the BOE took a look at the likely
impact of the Diamond Jubilee celebrations, with its extra bank holiday,
on Q2 growth.

As the Office for National Statistics does not workday adjust data
to take account of one-off bank holidays, the extra June 5 bank holiday
will have hit activity. Also, as the holiday came in the last month of
Q2, there will have been little time for business to recoup lost
activity that quarter.

The BOE Monetary Policy Committee’s central forecast was that the
Diamond Jubilee would knock around 0.5 percentage point off quarterly
growth and then add around the same amount to Q3 growth.

If underlying growth was running weaker than the MPC had expected,
at close to flat, and the committee’s prediction on the impact of the
Jubilee was correct, then those analysts forecasting a 0.4% or 0.5%
quarterly contraction in Q2 could turn out to be right.

The MPC’s minutes from its July 4 and 5 meeting highlighted the
weakness of some of the data as Q2 progressed.

The minutes noted business activity surveys had been weak, with
service sector growth slowing and a very sharp fall in the CIPS/Markit
manufacturing index in May, which was only partially recouped in June.

“It was possible … that these surveys of business output had been
temporarily affected by the impact of the Diamond Jubilee public
holidays and heightened uncertainty about the euro area,” the minutes
said.

“The near-term outlook for GDP growth had weakened. It now seemed
possible that output would be roughly flat over 2012 as a whole,” the
minutes added.

The International Monetary Fund recently revised down its 2012 UK
growth forecast to just 0.2%.

The looming release of the Q” GDP data has weighed on sterling this
week with reports of market pessimism over the numbers. Given the gloom,
if the headline growth quarterly fall matches consensus it will come as
a relief.

–London Newsroom: 0044 20 7862 7491; e-mail: drobinson@marketnews.com

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