BoE’s improved forecast conceals grim assessment of the economy


The Bank of England’s upgrade of its 2021 forecast last week to the highest rate in almost 70 years disguised a darker-than-previously assessment of the UK’s economic performance for this year and next. , according to the Financial Times analysis.

The sharp upward revision of the annual forecast for 2021 from 5% to 7.25% was based entirely on better-than-expected past performance aided by the resilience of the economy since the second wave of coronavirus in November, according to details . forecasts from the BoE.

The FT found that the bank had downgraded its outlook for economic growth for each quarter until the end of 2022.

The analysis supports the position of Andy Haldane, chief economist of the BoE, that his colleagues on the monetary policy committee have been too gloomy about resuming the pandemic with the risk of inflation rising rapidly, becoming problematic by the end of the year.

Last week, Haldane disassociated himself from the other eight MPC members by voting to limit quantitative easing this year. He said he believed that a better past performance of the economy since the second half of last year would also translate into better future performance.

Explaining his point of view in the minutes At last week’s MPC meeting, the chief economist wrote: “There was now clear evidence that the economy was growing rapidly, with household and business spending surprisingly significantly and persistently at rising, and consumer and business confidence rebounding.

He warned that “there were good reasons to believe that this strength in domestic demand would be sustained, including through the shrinking of the large stock of accumulated savings, leading to a period of excess demand longer and more sustained than that incorporated in projections ”.

The FT’s analysis found that the majority-approved forecast on the MPC contained some strange features, which were not highlighted by Governor Andrew Bailey when he explained the BoE’s thinking last week.

Bailey did not explain at the time that the whole upgrade to the annual growth figure was due to a change in the central bank’s outlook on the past. Bailey also didn’t point out that the bank had become more pessimistic about growth prospects.

The bank has curtailed the likely rebound in growth, despite the recent budget pumping more money into the economy than expected and evidence that companies are investing to take advantage of the corporate tax super-deduction. In addition, the BoE forecast had taken into account a greater amount of household spending from savings accumulated during the lockdown than previously thought.

But during his press conference, Bailey gave the impression that the new forecast was more optimistic for quarterly growth than the previous iteration. “Demand growth is being stimulated by lower health risks and lower uncertainty, as well as fiscal and monetary stimulus,” the governor said.

The FT analyzed and compared the forecasts for February and May and found that the BoE revised them down for the second quarter of the year by 0.9 percentage points and 0.65 percentage points in the third and fourth quarters. Growth forecasts have also been revised slightly downward for 2022 as a whole.

The BoE and Haldane declined to comment, but the chief economist is expected to set out his more optimistic view before leaving the central bank at the end of June in a speech or during an appearance before a parliamentary committee.

So far, Haldane has remained a diplomat. Last Friday, he said the ‘triple whammy’ of the 2008 financial crisis, Brexit and the coronavirus pandemic had hit the economy hard, but was now approaching the point where the three uncertainties dissipate.

Wednesday’s first quarter numbers should confirm economists’ view that the lockdown this year has been far less damaging to activity than the initial shutdown of the economy last spring.

Haldane’s point of view suggests that the resilience shown by consumers in the first quarter reflects a pent-up desire to spend and if this continued into the summer it would threaten to push inflation considerably above the BoE’s 2% target later this year.

Column chart of the contribution to the production loss compared to January 2020 (%) showing that the UK economy was much more resilient in the second wave of Covid-19

Haldane warned that supply chain bottlenecks alongside rampant consumption “pose upside risks to meeting the medium-term inflation target.”

Many other economists are also starting to worry about a re-emergence of inflation as the recovery continues.

Neil Shearing, chief economist at Capital Economics, said that “all the ingredients for a rise in inflation are there”, but added that the evidence suggested the UK would probably not be the hardest. touch. “There is a much greater chance of a rebound in inflation in the United States than in Europe or Japan,” he said.

Haldane also acknowledged on Friday that there was still a lot of uncertainty over the economic outlook and that a rapid recovery over the summer was not guaranteed.

But most economists are revising their forecasts upwards, with Goldman Sachs expecting growth of nearly 8% this year.

Some, however, remain more cautious. The National Institute for Economic and Social Research on Monday released significantly more pessimistic forecasts than those of the BoE, with a slow recovery, stemming from a more pessimistic view of exports and business investment.

He expects households to be more careful and not rapidly increase the proportion of their income spent to return to pre-pandemic levels. Jagjit Chadha, Director of NIESR, said: “We are not seeing cases of such rapid growth.”


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