At Wednesday’s Bank of England inflation report, the Monetary Policy Committee took a look at its August economic forecasts and said “what bunch of extreme pessimists produced these?” No one needs to answer that question.
The MPC then revised its growth forecast sharply higher with the consequence that unemployment was expected to fall much quicker, hitting 7 per cent 18 months earlier than it thought in August. But the best news for people in Britain was that in the November forecasts imply the people in charge of interest rates think inflationary pressures are weaker than in August, so more rapid growth and lower unemployment comes without the cost of higher inflation.
In times past, such an inflation report would have been seen as dovish. Even with stronger growth expected, the inflation forecast was revised down so there was less need to tighten monetary policy. Everyone would have understood the meaning. Read more
The Office for National Statistics has just published October 2013 inflation figures. These show the consumer price inflation rate falling from 2.7 per cent in September to 2.2 per cent last month, a much greater fall than the average of economists’ expectations of a drop to 2.5 per cent. The discredited retail price index, which is still used to uprate index-linked government bonds, rail fares and other utility bills fell from 3.2 per cent in September to 2.6 per cent. The essential news and context comes in the following five charts.
1. Inflation falling faster than Bank of England expected Read more
The well-worn chart below is often taken to show chronic lack of effective demand in the economy. It shows the level of gross domestic product (in red) alongside a trend line from 1997 to 2008 (in blue). Output is now 18 per cent below the previous trend and this purports to signal the failure of the British authorities to stimulate the economy sufficiently over the past five years.
Industrial production and manufacturing figures for September were published by the Office for National Statistics this morning. They showed manufacturing picked up in September a little more than the statisticians had expected when they estimated third quarter economic growth, but not enough to trigger a revision to the 0.8 per cent initial growth estimate. The following five charts add some detail and put the figures in context.
1. Manufacturing still has a long way to recover Read more
This morning the Bank of England published its monthly Bankstats. These are a treasure trove of information with the headline data showing mortgage approvals at their highest rate since 2008. But the BoE release contains much more information than that, which is summarised in the following four charts. These are better than the charts the BoE publish in their press releases as they show a much longer time series and attempt to put the figures into context.
1. Mortgage approvals Read more
The Office for National Statistics reported today that the economy grew 0.8 per cent in the third quarter of the year. Here are six charts which explain the importance of the data
1. Growth is back at normal levels Read more
Mark Carney, the Governor of the Bank of England, announced a dramatic easing of the central bank’s attitude towards financial companies with temporary funding difficulties, he buried the policies of Lord King, his predecessor, and adopting a stance much more similar to the Federal Reserve and European Central Bank.
Reaction from our economics team:
It might appear unsurprising that a global citizen such as Mark Carney tonight proved such a champion of globalisation. However, this misses the fact that since the crisis a debate has raged between central bankers on the merits of the internationalisation of finance.
Since the crisis global capital flows have collapsed. During it, the risks associated with cross border contagion were all too obvious. The UK has a banking system far more reliant on foreign branches based here than either the US or the eurozone. In recent years, their support to businesses here has waned spectacularly.
Still, Mr Carney was clear that he believed international capital was more blessing than burden. He said he was still keen for London to maintain its status as a global financial centre. Read more
The rate of unemployment was published to day and sits at 7.7 per cent in the three month period between June and August. It is the last set of figures to be published before the next Bank of England inflation report as the next monthly publication date coincides with that report on 13 November. What better time, then, to compare the BoE’s all-important August inflation report forecast with the published official figures.
In the August forecast, the BoE mean prediction for Q3 unemployment rate was 7.9 per cent, with a standard deviation of 0.1 percentage point around the mean. In English: after adjusting for risks, the Bank thought unemployment was not likely to be more than 0.1 percentage point away from 7.9 per cent and almost certainly not 7.7 per cent*. In lay terms, the forecast below was a stinker.
I am not concerned at all that the BoE produces a horrible forecast. That’s life. It has no bearing on the BoE’s credibility. What matters is the way the central bank will respond. There are two broad sorts of responses it can choose. Read more
The Office for National Statistics reports today that the house price index “surpassed its previous peak” in July by 0.3 per cent. Boom, boom, bubble, bubble Britain appears to be the right description.
Yet Sir Jon Cunliffe, the incoming deputy governor for financial stability of the Bank of England said yesterday that the housing market was “patchy” and he dismissed bubble fears.
Sir Jon is far from stupid, so why does he see the market differently to Britain’s national statisticians? Read more
If you look at one chart in the October 2013 World Economic Outlook, make it chart 1.13. For successive IMF forecasts, the chart shows how far output is below the pre-2008 trend. This sort of “hedgehog chart”, so called because the spikes from incorrect forecasts can resemble the creature, demonstrates how thinking has changed in the fund since the crisis started.
A number of things stand out.
1. For most areas, the red line, representing the forecast produced in April 2009 at the worst moment in the crisis initially proved too pessimistic. The world did better than feared.
2. Sadly, most areas are no longer beating the April 2009 forecast. Output in the world economy is now below that forecast for 2013 for the globe, the US, the eurozone and Japan. In developing Asian economies, output is now projected to fall below the 2009 forecast next year. April 2009 still appears too pessimistic only for Latin America, a region many think has been disappointing of late. Read more