Bank of England throws in the towel on growth – where does this leave Osborne?


 

The Bank of England’s Inflation Report (pdf) 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.

GDP-projection-based-on-market-interest-rate-expectationsHeadlines 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 off the figures. But the bigger story is really the medium term forecasts for growth, as Chart 1 (see right) shows.

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

The gloom comes across from the opening paragraph (p. 5) 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 a 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 any more monetary support.

Plan A is now over, does he have a plan B?

This article was first published on ToUChstone.

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  • LB

    So how does growth help?

    Lets do the maths.

    Get one million people off benefits and back to work. Min wage jobs, so they get taxed, plus presumably come of benefits. That’s a generous 15,000 a year that the state is better off.

    15 bn saved.

    Who is going to pay the other 135 bn?

  • Ben

    Nationalise the utility companies and employ many people to fix the colossal water pipe bursts leaking water that results in hosepipe bans every year.

  • Newsbot9

    That’s right, you will only allow minimum wage jobs. And of course you’ll cut off their benefits, leaving them in desperate poverty, which will lead many of them to need NHS and social services and…oh right, you’re removing those even though people will still pay.

    Of course your answer is to kill off the poor and import foreign workers to replace them.

    Can’t allow the workers to live, can you. Gotta default in your world.

  • Newsbot9

    That’s not the problem. The problem is that we haven’t built those newfangled “pipeline” things which move water around between rainy and dryer areas…

  • Nemesea

    and how many lives will be lost by taking benefits away from people and family’s who’s lives depend on them ???

    because they are unable to work, and even if some came off benefits to work for min wage the price of things nowadays a family of 5+ would still not manage to support its self…..

    and i know this because i am a mother of 3 kids which i love to bit and i am on benefits (hell i would love to work and get out of the house but i know i cant due to been disabled) and my partner cares for me and our kids….

    and at times even on benefits we struggle to make ends meet and many times me and my partner have gone hungry just to be able to make it so the kids have something to eat and i know we get just above min wage so just think of all the children and family’s that will not be able to manage on a min wage and no benefits i know for a fact if i was taken of benefits i wouldn’t be able to keep my family afloat and i know i would starve my self trying to keep it afloat and many other mothers and fathers would and i know there are many other family’s that are even more worse off than what we are….

    and i haven’t even mentioned the elderly and their pensions as i know a few who don’t have their heating on because they cant afford to even when the weather is really cold and i know a few who have died from getting ill due to been cold…..

    so from what i have seen since this government has been in they have lied, blackmailed, ignored problems, and more or less try to kill off people that are not within their high rich class range which would be the elderly, sick/disabled, poor, and the homeless

    also you may not have noticed that most employers are letting people go so finding a job when no one is taking on is quite hard to do