BoE loses respect
Just as the UK government prepares to give the Bank of England more power, the central bank’s reputation with the public has slipped to its lowest level since independence.
Once a revered institution, as the chart shows, barely more people express satisfaction with the Bank’s ability to set interest rates to control inflation than those who are dissatisfied.
The UK hangover gets worse
Yesterday, I included the Treasury chart below showing that the potential level of output is 13 per cent lower than that assumed by the same organisation in March 2008.
But the chart has been troubling me overnight because it is comparing apples with pears. The calculation methodology of GDP has changed since the 2008 Budget in a way which would have made the 2008 trend higher.
Osborne’s grim day
When he established the Office for Budget Responsibility, George Osborne had never envisaged his creation would give him such a grim day less than 18 months later. But the OBR has just told the chancellor that without further action his deficit reduction ambitions were seriously off track.
The latest forecasts with lower growth and higher borrowing implied Britain would miss Mr Osborne’s March Budget ambition of eliminating the current structural deficit by 2014-15 by miles. The original OBR forecasts showed he was set to meet his goals not one, not two, but only three years later in 2017-18, close to the election after next.
With such bad news, the government has had to announce not a “plan B” of policy stimulus, but an “augmented plan A” with £15bn additional spending cuts a year by 2016-17 – deeper cuts in the final two years than the annual austerity being undertaken now. And that is all just to allow him to scrape home on his fiscal mandate. Austerity is no longer a four-year pain, but a six-year trial.
Britain’s growth potential
Ahead of the Autumn Statement, the Treasury has released some details of its plan for growth, in what appears to be a cynical bid to muddy the waters. The truth is that estimates of Britain’s growth potential are being revised down across the board.
Are the announcements mostly sensible? They’re OK.
Are they large? No.
Will they change the narrative of the Autumn Statement? Only if Britain allows itself to be hoodwinked and reporters are as pliable as ministers hope.
Growth that’s gone for good
The Bank of England has downgraded its view of the sustainable level of UK output at almost every inflation report since November 2007.
Today, the Bank’s latest forecast expects the output lost in the recession since the start of 2008 will be recovered only in the third quarter of 2013. If true, that means when Sir Mervyn King leaves office in June 2013, output will still not have recovered from the recession. The governor’s second term will be one of no growth at all.
UK GDP: Relief without reassurance
Worrying things happening in the eurozone today, but Britain still posted 0.5 per cent growth in the third quarter. Relief rather than reassurance is the right response.
Relief is apt both because the City and government officials thought the figure would be 0.3 per cent. But before anyone goes away thinking that third quarter growth is close to Britain’s 0.6 per cent post-War average, they need to take account of five areas for concern about these figures.
A UK nominal GDP nightmare
There is a rule of thumb that says you want nominal gross domestic product to grow by around 5 per cent a year. It is a pretty good guide, because it roughly accounts for the sum of Britain’s long-run productivity growth and a stable inflation rate close to the Bank of England’s 2 per cent CPI target.
Following the latest national accounts revisions, one worry is that the year-on-year growth in nominal GDP in the second quarter was only 3 per cent. Low nominal growth implies semi-fixed cash variables such as public spending, borrowing and debt become a larger share of GDP when the denominator is growing slower than was expected. But that is not all, as the following chart shows.
UK inflation: up, up and away?
Listening to Wolfgang Schäuble, German finance minister, speak in London yesterday, he was genuinely shocked by Britain’s 4.5 per cent inflation rate in August. The Weimar Republic and the 1923 hyper-inflation still looms large in the German psyche.
Just imagine what he would make of today’s rise in the consumer price inflation to 5.2 per cent, the highest rate of inflation in Britain since the early 1990s.
I have not seen his text, but I am sure Sir Mervyn King will show his Anglo-Saxon side when he makes one of his three major speeches of the year tonight and will explain why he, unlike Mr Schäuble, is not concerned about inflation’s spike. Expect to hear about VAT, energy prices and commodities and that domestically generated inflation remains very low. Sir Mervyn can say nothing else.
What else can we say about today’s inflation figures and monetary policy?
The BoE’s Germanic tendency
At less charitable moments, I have described the Bank of England’s attitude towards “credit easing” as akin to belligerent buck-passing. By burying a 2009 agreement with government to buy private sector assets and investigate ways to increase the availability of credit to the corporate sector, the Bank was putting purity before pragmatism, I argued.
Having listened to subsequent Bank explanations of its attitude towards credit easing, it appears that the Bank is actually taking a leaf out of the book of the Bundesbank and the European Central Bank, showing it to be a true believer in Ordnungspolitik – the German concept of order and playing by the rules, which has no direct English translation, but was brilliantly explained by Ralph Atkins last year.
The 14 per cent question
Things go from bad to worse for the UK economy. Perhaps the least reported, but most important aspect of last week’s national accounts revisions is the apparent difference between the pre and post crisis trend growth rate.
Because the Office for National Statistics improved (lowered) its calculation of inflation in the national accounts without changing nominal gross domestic product much, growth rates in most years were significantly revised higher. The average annual rate of growth between 1997 and 2008 rose from 2.9 per cent to 3.2 per cent. But the ONS also said the recession was deeper and sharper than before, revising down post 2008 levels of output even with the more generous inflation measure.
| About this blog | Blog guide |
Latest central bank news
Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS
Ralph Atkins, Frankfurt bureau chief, has been writing about European economics and politics for the Financial Times for more than 20 years following an economics degree from Cambridge. He has been watching the European Central Bank and eurozone economies since 2004. He has previously worked in London, Bonn, Berlin, Jerusalem and Brussels. RSS
Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS
Claire Jones is Money Supply economics team writer, based in London. Before joining the Financial Times, she was the editor of the Central Banking journal and CentralBanking.com. Claire studied philosophy and economics at the London School of Economics. RSS
James Politi is US economics and trade correspondent for the Financial Times, based in Washington DC. He joined the Washington bureau in January 2008 following four and a half years as US deals correspondent covering M&A and private equity. James Politi joined the FT in London in 2000 with an MSc at the London School of Economics, and undergraduate degrees from Georgetown University and the University of Florence. RSS
Older entries
