ALEX BRUMMER: Bailey beats retirement after his bleak and catastrophic predictions for the UK economy
Here’s a lesson for politicians and commentators who have decided to treat this week’s forecast by the International Monetary Fund (IMF) of a 0.6% fall in the UK economy in 2023 as calamitous: economic projections are not not written on stone tablets.
In November, the Bank of England cast a pre-holiday pallor over Britain when it predicted the longest recession in the country’s history and a fall in output from peak to trough of a whopping 2 .9%.
Less than three months later, the Bank says the recession will be less deep, spanning five quarters instead of eight, and the drop in growth will be 1%.
It’s a big overhaul.
The IMF is specific in identifying the causes of the UK’s sub-octane performance. The Chancellor has weighed so heavily on the fiscal impact on the economy that the incentives for businesses to invest are negligible.
Positive outlook: Bank of England boss Andrew Bailey has predicted inflation will ‘fall rapidly’ at the end of the year
Compare how the government uses its balance sheet and what is happening in the United States and Germany.
President Biden’s $738billion (£600billion) Cut Inflation Act is a huge push to green the US economy.
In Germany, government and industry have developed a “Marshall Plan” to deal with the post-Russian energy future.
There is a government-funded plan to boost battery capacity to support the manufacture of up to 3 million electric vehicles a year.
Meanwhile, Berlin and the energy industry have come together to compete for a liquefied natural gas terminal in less than a year.
The UK is an exception in collecting tens of billions in additional business taxes, but has no industrial strategy. The implosion of the poorly planned and poorly supported Britishvolt factory is a case in point.
When it comes to interest rates, Bank of England Governor Andrew Bailey, Bank insiders and Monetary Policy Committee member Jonathan Haskel don’t think enough has been done to slay the dragon. ‘inflation.
The rapid expansion of broad money has moderated, so the source of the surge in the cost of living has subsided. The Bank is concerned that private sector wage settlements are too high and add to upward pressure on prices.
The answer is a half percentage point increase in the bank rate to 4%.
How interesting that two outside members of the interest rate setting committee, Swati Dhingra and Silvana Tenreyro, voted for no change.
The combination of sky-high tax increases and interest rates rising to the highest level in 14 years is overdone.
In the same way that the Bank of England was reckless when prices exploded in 2021, it is now overcompensating with ten successive jumps in the cost of borrowing.
Groupthink has been a feature of major central bank policy in recent years, tarnishing performance.
Policy changes create casualties. Homeowners faced with rising mortgage bills are spending less and clogging the housing market.
If second buyers postpone their purchases, first-time buyers are excluded. Likewise, home builders are slowing down land acquisition and development and it takes a long time to move the market.
As for savers, there has been a movement in their direction. National Savings & Investments threw down the gauntlet with its 4% one-year bond.
The right thing to do for the big banks would be to react by increasing the return on their savings and deposits.
Instead, they embrace the endowment effect, the increased profits that occur when the spread between deposit and lending rates widens. It’s the bank’s dirty little secret.
Banks are happy to sit back and watch savings absorb what Chancellor Jeremy Hunt describes as the ‘stealth tax of inflation’.
This document is not immune to overconfidence in forecasts. The recently deceased British economist Professor Alan Budd was passionate about what can be observed.
Clues to economic health can be gleaned from the number of shopping bags clutched by shoppers, crowded subway stations and cranes hovering above city centers. Evidence can also be drawn from closed stores in Darlington and the use of food banks.
Retail specialist Springboard reports that despite railway strikes, the number of workers returning to the office in January 2023 was 17.3% higher than last year.
The number of people shopping in city centers has increased by 15%. These are numbers we can actually believe.