Bill Jamieson: Bake Off Britain rises nicely despite Carney
Latest figures on the UK economy have blown a further hole in the already fractured credibility of the central bank governor. Carney was not slow in coming forward with dire warnings of the fate that awaited the UK economy following a Leave vote in the EU referendum back in June. Along with other BoE policy-makers in the lead-up to the referendum, Carney was vocal in warning of the dangers of an economic slowdown.
He went on to cut interest rates and hinted that a further cut from the current 0.25 per cent rate would be forthcoming if the economy failed to respond. Adding to the tone of gloom, the Bank’s economists forecast in August that UK economic growth for the third quarter would relapse to just 0.1 per cent and sink to zero in the final three months of the year.
But these pessimistic prognostications have been dealt a major blow by the latest preliminary estimates from the Office for National Statistics. These put third quarter growth at 0.5 per cent quarter-on-quarter – way above the Bank’s prediction as recently as two months ago. It seems as if the damage Brexit has inflicted has been on economists rather than the economy.
As a result it now looks almost certain that a further bout of monetary stimulus by way of a cut in interest rates at this week’s meeting of the Monetary Policy Committee is off the table until well into 2017 – as is a further resort to Quantitative Easing.
And it also suggests a restraining hand has now fallen on Chancellor Philip Hammond. In the immediate gloomy wake of the Brexit vote result, he signalled that his Autumn Statement, due on 23 November, would see supportive, stimulative measures for UK businesses. A big boost to infrastructure projects and public spending came to be widely expected.
But with the latest poor figures on the public finances – the budget deficit hit £45.5 billion in the April-September period and is forecast to top £72 billion for the financial year as a whole against a now jettisoned target of £55.5 billion – he cannot afford to be generous. As for Public Sector Net Debt, this stands at an eye-watering £1.63 trillion or 83.3 per cent of GDP.
An economy heading into a tailspin, as the Treasury and the Bank forecast, might have justified a bold spending boost. But a recession now looks far less likely. And this is not the first time that “guidance” from the Bank governor has proved wide of the mark. Indeed, his innovation of “forward guidance” on interest rates, unveiled to great fanfare in August 2013, was designed to help give businesses and households greater certainty over the longer term course of interest rates. Under this, he said, policy-makers would not consider raising rates until unemployment fell back to seven per cent. The Bank’s own forecast for 2016 at the time put unemployment above seven per cent.
That “forward guidance” has long since been abandoned – and it’s not hard to see why. On several occasions last year Carney hinted at an interest rate rise on the horizon – only for rates to mark time. As for that unemployment forecast, today’s reading shows the UK jobless rate holding steady at a near 11-year low of 4.9 per cent. And in the intervening period, far from interest rates being raised, they’ve been cut.
Attention now swings to the new forecasts in the November Quarterly Inflation Report due for release this Thursday. The Bank’s growth forecasts for 2016 will clearly have to be revised up and it’s highly likely that the estimate for 2017 will also have to be raised given that the economy has performed much better than previously forecast. Back in August, GDP growth was seen at 0.8 per cent in 2017 and 1.8 per cent in 2018.
The latest GDP data is the first official verdict on how the economy has performed since Britain voted to leave the EU. The figures rule out the prospect of a technical recession – defined by two consecutive quarters of contraction – in the second half of the year, which was predicted by many economists before the referendum vote.
Scotland may feel it has missed out on this show of surprising resilience – and needs all the stimulus it can get. In the second quarter of this year, Scotland’s economy grew by 0.4 per cent compared with the first quarter of 2016. UK GDP growth by comparison was 0.7 per cent. Contractions in our construction industry tempered growth in the production and services industries (particularly business services and finance).
As for the third quarter, it is highly unlikely that gap will have narrowed by much. On the plus side, Scotland experienced slightly better retail sales growth than Britain as a whole in the three months after the Brexit vote – the value of sales rose by 2.1 per cent between July and September – slightly above the two per cent growth recorded across the UK overall and the volume of sales also rose by 2.1 per cent north of the border, compared with 1.8 per cent across the UK. But other sectors in Scotland, such as manufacturing and construction, have continued to struggle.
And while the figures for the UK overall may look benign, 2017 and beyond looks altogether more testing as Brexit negotiations and uncertainties intensify. The initial Brexit forecasts of the Chancellor and the Bank of England may have been severely damaged. But both the Bank and the Chancellor will need to keep their powder dry.