Wednesday, May 15, 2013
King's last bow: a more upbeat forecast
Posted by David Smith at 12:00 PM
Category: Thoughts and responses

Today was unusual in two respects. The first was that it was Sir Mervyn King's last inflation report press conference, after more than 80, ahead of his retirement next month. The second was that the Bank's new forecast is slightly more upbeat than the one issued three months ago, which according to him is the first time this has happened since before the global financial crisis.

There is lots of good detail in the report. So, for example, the Bank expects a 0.5% rise in GDP in the second quarter, a steady recovery in consumer spending, a pick-up in business investment, a small increase in employment over the coming year and an increase in mortgage approvals. These and other assumptions/expectations are set out in a new feature of today's report, intended to show greater transparency, on p.42.

King said the biggest risks to the UK economy were external, particularly the eurozone, where today's Q1 GDP figures were mixed but overall on the weak side. However, the big picture, according to the report, is that: "Taking those risks into account, the [Monetary Policy] Committee’s best collective judgement is that the economy is likely to see a modest and sustained recovery over the next three years."

Inflation will come down gradually to the 2% target, but will remain above it for most of the next two years. It needs to, given that pay growth in the year to the first quarter was just 0.4%. The Bank noted that the markets do not expect a rate hike until 2016. The inflation report is here.

How do we square the Bank's cautious optimism with the latest labour market numbers, which as well as weak pay growth showed a rise in unemployment and a fall in employment? The short answer is that, while these figures were not strong, they were not particularly weak either.

Unemployment rose by 15,000 in January-March to 2.52m (a lower level than reported a month ago for December-February). The unemployment rate was 7.8%. Employment fell by 43,000 to 29.71m, though this appears to reflect particular weakness at the start of the quarter. The claimant count fell by 7,300 to 1.52m. The big picture is that the really strong rise in employment has abated, but that the job market has not gone into reverse. More here.