News Column

Daily Mail, London, Alex Brummer column

February 13, 2014

By Alex Brummer, Daily Mail, London



Feb. 13--No one said being governor of the Bank of England was going to be easy. So it is not surprising that Mark Carney is the subject of some jibes for the Bank's rubbish forecasting record and naive choice of a single point, the unemployment rate, for its first shot at forward guidance.

We should remember that the Bank is in good company with its forecasting errors. The Office for Budget Responsibility, the OECD and the International Monetary Fund have all had to eat humble pie over their UK forecasts.

Actually, there is nothing very unusual about what has happened to the economy in recent months.

As one former Treasury mandarin mentioned to me recently, if you look back at previous British recoveries from recession they tend to be much stronger than anticipated the Bank is now predicting above trend 3.4pc output growth this year and start when you least expect them.

So when George Osborne was pulling out his hair (or at least adjusting the style) at the time of last year's March budget, and Ed Balls was still frantically making his flatlining gestures, the economy was already on the move.

The delayed upturn may well be attributed to the need to repair the financial system, which is four times the size of gross domestic product, and still adjusting to the events of five years ago. The peculiarity of this recovery is that, as in the United States, the lead indicator has been unemployment, which in the past has often lagged growth.

So as well as hoarding cash, employers have also been hoarding competitively priced workers even if they are on part time or zero hours contracts. All this means is that Carney is at, or close to, his 7pc jobless guidance almost two years ahead of expectations.

The good thing from the Bank's point of view is that the message it has been putting out about acting gradually before raising interest rates has been absorbed by the markets that expect a quarter point rise in bank rate by the second quarter of 2015 and a 2 per cent rate by the end of 2016.

That kind of rate projection had been absorbed by lenders before the Inflation Report was published, and the pricing, for instance, of fixed rate mortgages has already been adjusted. It was knee jerk foreign exchange dealers who decided the pound needs to rise.

The exact nature of the revised guidance is a bit murky and based around the concept of an output gap the idea that the UK economy is still operating at well below capacity.

So catch-up requires some evidence that productivity is on the rise, competition for quality employees is pushing up wage rates and under-employment the part-time and zero hours workers are more occupied. The big political dilemma will come next spring: will the Bank be independent enough to raise interest rates in the teeth of a general election campaign?

There is a convention in the US that the Federal Reserve, except in extremis, holds off during the final stages of a presidential contest so as to keep its neutrality.

If the Monetary Policy Committee does decide to go before the election it may not be that damaging to the Con-LibDem government. Mortgage pricing has already adjusted and a slight tickle upwards in savings rates might just remind people that positive returns are on the way after several years of painful real falls.

One also suspects that the MPC might not be entirely happy about going first if the US and other advanced nations are still holding rates at super low levels.

To do so may bring unwanted capital inflows that could make sterling less competitive.

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Stephen Billingham may like to take credit for turning around nuclear generator British Energy, before it was sold off to French power group EDF, but his handling of pubs group Punch Taverns has shown much less finesse.

On Tuesday Billingham was threatening to wind up the whole caboodle, jeopardising the future of 4,000 pubs and landlords unless bondholders agreed to re-organise debts. Punch has reversed itself and sensibly decided to proceed with negotiations on a debt deal.

The lesson of all of this, whatever the outcome, is that debt-fuelled private-equity-style takeovers of consumer firms are a menace and the banks should avoid them like a plague.

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The Office for National Statistics is full of interesting facts.

It has found that buying UK-produced food provides the biggest boost pound-for-pound than any other economic activity. So much for EU payments for keeping farmland idle for green reasons.

Similarly, spending on Britain's creative industries including arts and entertainment services also provides a big boost to output. And the biggest losers? Domestic services such as cleaning the house and gardeners. Time to buy your own Dyson and lawnmower.

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(c)2014 Daily Mail (London, )

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Source: Daily Mail (London, England)


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