Monthly Archives: March 2014

George Osborne has today made a pledge to restore Britain to “full employment”. It is not at all surprising that the chancellor is setting his ambitions in terms of jobs because that is the one area of the UK economy that has performed extremely well over the past four years.

Economic growth has disappointed as the economy stagnated in 2011 and 2012. Living standards are well below 2010 levels even with the growth that has been achieved. Tax revenues are causing concern across government because they are persistently weak. And productivity – output per hour worked – has been close to the worst among advanced economies, raising big and difficult questions over Britain’s ability to sustain rises in living standards once unemployment has returned to normal levels.

But what does Mr Osborne think constitutes full employment? Here are some possibilities.

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Forget George Osborne’s speech; ignore Ed Miliband’s response. Politics does not tell you anything about the nation’s finances. These charts do. The big message is that the public finances in Britain were terrible, are terrible and still need lots of work to repair the damage.

1. The deficit is still terrible

Borrowing is falling and public sector debt is not rising so fast, but these facts are small comforts. The big picture is that Britain is still borrowing hugely – more than almost any other advanced economy – and will do so for many years to come.

The good news from the red line is that the borrowing outlook is better than a year ago, but still falls short of expectations in the 2012 Budget.


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Robin Harding

An independent review of the IMF’s economic forecasts out today basically gives the Fund a clean bill of health, but finds that when making big lending programmes, its initial forecasts tend to be optimistic on growth and pessimistic on budget deficits. Read more


By Philip Stephens

You may think the big commercial banks got away with it after the great financial crash. But what about the Bank of England? Britain’s central bank was asleep at the wheel when the storm hit in 2007. Mark Carney’s radical shake-up of personnel and responsibilities in Threadneedle Street is an uncomfortable reminder that failure is sometimes richly rewarded.

The blame does not lie with the present governor. Mr Carney was drafted in from Canada last year to replace the departing Mervyn King. The cutbacks in banking supervision that preceded the crash came on the now Lord King’s watch. A reorganisation that leaves Mr Carney with a total of five deputies, however, is a reminder of just how much additional power has accrued to the Bank during the past few years. When the BoE was first granted independence during the late 1990s, the then governor happily settled for two deputies. Read more

This is a question to which I have not given a huge amount of thought, since all central banks have declared an intention to unwind QE eventually and have given the impression that any other policy would be disastrously inflationary.

The Bank of England has always had an eventual unwind as part of its declared policy. Normally the logic goes that without selling assets back to the private sector and destroying the money the central bank has created, the price will be a huge credit boom once the recovery is underway. In this world it’s best to get back to a more normal level of base money in the system to prevent the money supply growing out of control.

This logic is challenged by the BoE’s quarterly bulletin article on money creation in a modern economy. The article attacks those who think QE is automatically inflationary because it will lead to a ballooning supply of money chasing too few goods. Wrong, says the bank. Commercial banks lend because there is demand from households and companies, not because they have base money burning a hole in their pocket. And furthermore, the BoE adds, it can always control the demand for loans with monetary policy.

But if QE never can create inflation, the article raises a bigger question, which it fails to answer. Why bother to unwind QE? Read more

In a talk delivered on 3 January, which the ever-so-slightly disorganised Andy Haldane has just got round to writing up, the Bank of England’s head of financial stability beautifully sets out the new central bank orthodoxy on the benefits of macro-prudential policy.

First, he clearly defines the term:

“In a nutshell, it means that policymakers have begun using prudential means to meet macro-economic ends.”

Next, he looks back at the crisis and asks the correct question: what would have been different had macro-prudential policy been fashionable (it was invented) rather than deeply unfashionable in central banking circles. Read more

Robin Harding

I think people are confusing two separate questions in the recent debate about wage rises and spare capacity in the US economy: first, the amount of slack left in the labour market, and second, whether the Fed should deliberately try to overshoot its inflation objective of 2 per cent.

The extent of slack Read more

Claire Jones

Digging into the details

One of the most important financial events of this year is the European Central Bank’s Asset Quality Review. The review is the opening act in the central bank’s health check of the eurozone’s biggest lenders, which goes by the glamorous title of the Comprehensive Assessment.

The ECB today published details of the second phase of its AQR, which will see national regulators, under the scrutiny of the ECB, scour the balance sheets of the region’s 128 biggest lenders to see what’s lurking in the darkest parts of their loan books. Unlike most earlier exercises, the exercise will focus on those murkiest of corners — what are known as lenders’ Level 3 assets.

Here’s a quick Q&A on what that entails. Read more

John Aglionby

Bank of England Governor Mark Carney faces a grilling from MPs on three separate subjects this morning. The Treasury Select Committee will ask him about the BoE’s latest inflation report and its revision to forward guidance, Scottish independence, and the allegations of manipulation of the forex market.

By Sarah O’Connor and John Aglionby


Claire Jones

The Bank for International Settlements has a fascinating section in its latest quarterly report drawing attention to the amount of debt globally, which has soared since the turn of the millennium from under $40trn to hit a whopping $100trn towards the end of 2012. Here’s the chart:

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Claire Jones

Forward guidance is central banking’s latest fad. Since the nadir of the crisis, all four of the major central banks have adopted their own version of it.

But is this fashion for keeps? That depends on whether the policy works.

Guidance involves saying what you’re going to do, before doing it. This, central banks hope, will temper markets’ uncertainty about what happens to interest rates.

Whether it works or not, then, depends on how much markets trust policy makers to do what they say they’re going to do. If investors think policy makers are lying, or central banks lose credibility by reneging on their pledges, then the guidance could harm reputations for a long time to come.

So does it work? According to a paper, published by the Bank for International Settlements today, it does. Well, sort of.

Yet the research also flags that if forward guidance does succeed, it could end up doing more harm than good. Read more

Emily Cadman

Welcome to our live coverage of ECB president Mario Draghi monthly press conference. Earlier the ECB kept its rates on hold for the fourth month in the row, despite inflation running at less than half its target. Follow the questions and reaction live here with capital markets editor Ralph Atkins and economics reporter Emily Cadman. The ECB also published its latest economic forecasts, revealing officials’ predictions for inflation in 2016 for the first time.


Claire Jones

Mario Draghi has warned that, though unlikely, Europe’s fledgling economic recovery could be derailed by the turmoil in Ukraine.

While the direct financial and trade linkages between the European Union and Ukraine are small, the ECB president told lawmakers in Brussels yesterday that the geopolitical dimensions of the tensions could have a strength that goes beyond mere statistics on capital and current accounts.

One of the most important economic aspects of those geopolitical dimensions is the supply of Russian gas to the EU.

The EU’s reliance on Russia has dwindled over the past decade, but it still matters. The relationship still accounts for 30 per cent of all gas imported into the bloc and when Gazprom cut off Ukraine in 2009, the disruption to energy supplies hit the EU hard. And though the EU is now less reliant on receiving its gas via this route, there’s no way of Russia using the gas button against the Ukraine without it having some impact on the rest of Europe.

The popularity of this tweet by Reuters’ Jamie McGeever highlights the interest this geopolitical dimension has received:

But there are good reasons to bet against Russia turning off the gas tap, regardless of whether or not one believes relations with the EU are the direst since the Cold War. Read more