Sunday, May 19, 2013
The governor's eyebrows point to an upturn
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

The CBI, the employers’ organisation, says Britain’s economy is “moving from flat to growth”. The Paris-based Organisation for Economic Co-operation and Development says its latest leading indicators point to growth in Britain at “close to trend rates”.

Most of all, Sir Mervyn King, presenting his final inflation report as governor, concluded his 82nd such press conference (he used to do them when he was chief economist and deputy governor), with the nearest thing to a hop, skip and a jump we have seen for a long time.

As he put it: “Today’s projections are for growth to be a little stronger and inflation a little weaker than we expected three months ago. This is the first time I have been able to say that since before the financial crisis.”

The Bank’s forecast is for “a modest and sustained recovery over the next three years”. Partly this is because some factors dragging growth down over the past 2-3 years - sharply falling North Sea and construction output - will cease to be a drag.

But mainly it is because it thinks more than four years of 0.5% Bank rate and £375bn of quantitative easing, together with better credit conditions as a result of the Funding for Lending scheme, and an improving global economic environment, will gradually strengthen the recovery. The upturn will remain weak by past standards, because of the hangover from the banking crisis. But an upturn it will be.

Specifically, the Bank expects the economy to build on the first quarter’s 0.3% growth with 0.5% in the second. Consumer spending will show sustained growth, though weaker than its 0.9% quarterly rise in 1998-2007. Business investment will grow, as will private sector employment, though more slowly than its astonishing 708,000 rise between December 2011 and December 2012.

It sounds almost too good to be true, or possibly a hospital pass from King to his successor. Wouldn’t it be terrible if Mark Carney’s first act as governor were to be to announce a forecast downgrade?

But King and his colleagues appear be genuine. Though this is not the first time since the crisis the Bank has predicted recovery - far from it - it means it about green shoots. Mention of green shoots takes me back to that very first inflation report of February 1993. I am pretty sure I was at that first press conference, albeit in short trousers, though details are grainy.

We have all changed a lot over 20 years and the Bank and its inflation report are no exception. In February 1993, blinking into the sunlight of greater transparency than in the previous three centuries of existence, the Bank stuck firmly to its brief.

There were no growth predictions (they did not come until 1997) and where the Bank touched on real economic variables, it was a touch pessimistic. So it expected rising unemployment to persist - in fact it peaked around the time that reported was published. It feared that big budget deficits would put upward pressure on inflation, though they soon began to fall.

Inflation was paramount. Coming off the high inflation of the late 1980s, there was a fascination about whether these new arrangements (with the Bank publicly advising the chancellor) could keep it under control. Growth, and forecasting it, was the Treasury’s job.

Some are nostalgic for those days, or at least a time when the Bank declared “inflation is a monetary phenomenon” and made it its mission, very successfully for the most part, to tame it.

Nowadays however most people are hungrier for what the Bank says about growth. When the governor is more optimistic about recovery, it makes the front pages (as it does when he is downbeat). The question is whether his cautious optimism now is justified.

On the day the latest inflation report was published official figures showed a 15,000 rise in unemployment to 2.52m over the January-March period and a 43,000 fall in employment to 29.71m. Is not that evidence of an economy getting weaker?

Probably not. The evidence is that the labour market strengthened during the quarter and I would expect a fall in unemployment, probably around 50,000, when the next figures are out in a month’s time. Employment is no longer growing as rapidly as it was, but has not gone into reverse.

The bigger worry, described here on April 21, is the weakness of pay, and falling real wages. Average earnings growth of 0.4% alongside inflation of 2.8% is a Micawberite recipe for misery.

It is also a puzzle. Consumer spending has risen for five quarters and. according to the Bank, probably rose in the first quarter. Private new car sales last month were 32% up on a year earlier. People are getting money somewhere, and only part of it is stronger growth in consumer credit.

I shall explore this further soon. But it is an odd sort of recovery in which real wages are falling and the Bank, to be fair, acknowledges consumer spending could be weaker than it expects, with households permanently shifting to a higher level of saving.

The other concern, of course, is Europe. Though France’s dip back into recession has attracted a lot of coverage - a 0.2% drop in GDP in the first quarter being the second in a row - its economy has essentially been flat over the past two years.

The problems are elsewhere. Italy’s 0.5% GDP drop was the seventh in a row and is starting to look like a proper and rather serious recession from which there is no obvious escape route.

Others, including Greece (GDP down 5.3% over 12 months), Cyprus (4.1%), Spain (2%) and Portugal (3.9%), remain in deep trouble. The European Central Bank has papered over the cracks but fundamental problems, and risks, remain.

The Bank has taken the view that policymakers will succeed in generating sustained recovery in the global economy, and even the eurozone will look better in the second half of the year. It acknowledges, however, that “disorderly adjustment” in the eurozone remains a risk. The hope is that it can be contained. Otherwise, the next governor’s eyebrows will be wearing an embarrassed frown.