From the TUC

Bank throws in the towel on growth – where does this leave the Chancellor?

14 Nov 2012, by Guest in Economics

The Bank of England’s Inflation Report is out and, as ever, well worth a read.

From a quick initial skim over it, what is striking is quite how pessimistic the Bank has become about the UK’s economic prospects.

Headlines will no doubt focus on the Governor’s comments that a triple-dip recession is now possible with GDP likely to contract in Q4 as one off boosts drop of the figures. But the bigger story is really the medium term forecasts for growth:

This is the weakest medium term growth forecast since the bank gained operational independence in 1997.

The gloom comes across from the opening paragraph onwards:

The UK economy has barely grown over the past two years, as it has laboured against the consequences of the financial crisis and its impact on global demand, a sharp squeeze in domestic spending power and a necessary fiscal consolidation. The period of weak demand has been accompanied by stagnant productivity, raising questions about the extent to which the supply capacity of the economy has expanded. Increases in energy and other import prices and in VAT have meant that CPI inflation has been well above its 2% target for much of this period.

The report goes on to note that growth is likely to be below its historical average throughout the forecast period, that household spending will remain weak, we will see only a ‘modest’ recovery in business investment and we are set for a ‘prolonged period of weak growth’ in productivity.

The FT’s Chris Giles has tweeted that the most significant sentence in the report is the innocuous sounding:

The likelihood that demand and supply capacity will continue to move together means that some of the sources of uncertainty affecting the outlook for GDP have limited implications for inflation in the medium term

But simply this is the Bank saying ‘weak growth is unlikely to bring down inflation’, or as Chris translates:

The big news in the inflation report is that the MPC now thinks weak growth has no effect on inflation – NO MORE QE

This is Report which reads like the Bank throwing in the towel – growth is going to be historically weak and there is nothing we can do about it.

The big question now is where this leaves George Osborne’s economic strategy – which has always been premised on expansionary monetary policy offsetting tight fiscal policy. He looks set to remain committed to fiscal contraction and the Bank doesn’t seem in the mood to provide anymore monetary support. Plan A is now over, does he have a plan B?

4 Responses to Bank throws in the towel on growth – where does this leave the Chancellor?

  1. jonathan
    Nov 14th 2012, 2:04 pm

    “necessary fiscal consolidation”? Isn’t that missing an “un-“?

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  3. Jayarava
    Nov 14th 2012, 3:02 pm

    Thanks. Laugh of the day for the Chart Title typo “Market interest rat expectations.” Market rats indeed.

    I suppose it’s no surprise that the BoE fails to mention the scale of UK private sector debt. Recently I found a Peston report on the BBC site from Nov 2011 which put private debt at 492% of GDP; or well over 100% of UK’s net worth. I keep asking economists: what is the interest payment on that debt? What is the average rate of interest for private debt? No answer from the pro’s yet. I don’t think anyone is interested.

    However for every 1% of average interest rate the interest payments alone cost the UK about 5% of it’s GDP. I reckon 10% average is not unrealistic. So 50% of GDP going on interest payments. No wonder demand is low, eh? What do you think?

    Hopefully any plan B would acknowledge and address this problem. But then I’ve stopped believing that government (any government) will begin to think outside the disastrous Neo-classical consensus. So more of the same, for 10 years? 20 years?

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