The Bank abandons a lot of hope

Mervyn King, merchant of gloom

A gloomy message from the Bank of England today, but no gloomier, perhaps, than we have come to expect.

Britain's central bank revised up its short-term inflation forecasts today and revised down its expectations for growth. That's been the story of nearly all the Inflation Report press conferences I have been to in the past few years.

We also had gloomy words from the Governor Mervyn King about the challenges facing the UK and broader global economy. But that's not exactly new, either.

What is new is that the Bank now thinks that the UK economy will not get back to where it was at the start of 2008 until well into 2015. This time last year, it thought we would have recovered out lost output by the second half of next year. Two years ago, it thought we would get there at the end of 2011.

The Bank hasn't just lowered its growth forecasts for the next year or so - it has more or less given up hope of being pleasantly surprised.

Chopped off

This chart shows what I mean:

Bank of England chart showing projected probabilities of GDP growth in 2013 Q4

I know, it's not pretty. But it's quite telling.

In essence, it shows how likely the Bank thinks it is that the UK will achieve various growth rates by the end of 2013. The taller the bar, the more likely it thinks that annual growth rate will be.

The grey line shows what the chart looked like in August. Back then the range of possible outcomes was quite widely spread: in effect, the Bank thought that anything could happen, including something very good.

The economy was just as likely to be growing by more than 3.5% at the end of 2013 as it was to be shrinking or broadly flat.

Now look at where the distribution of possibilities lies today - you'll notice most of the rosy scenarios have been chopped off.

In effect, the Bank now thinks that that kind of rapid bounce back in the economy is all but inconceivable. Its best guess is we will grow modestly - but if we're surprised, it's unlikely to be a happy one.

If you're the kind of person who thinks it is "always darkest before the dawn" you might think all of this a reason to buck up. Historically, the moment when absolutely everyone has resigned themselves to continued slump is usually the time when the economy takes off.

Nerdy journalists

But the journalists who came to the Bank this morning weren't interested in such musing. They were interested in the chancellor's decision to take hold of the big pile of interest payments sitting in the Bank as a result of its policy of quantitative easing.

I went into this fiendish topic in my last post. Suffice to say the governor does NOT think the Treasury move has compromised the MPC's capacity to set monetary policy.

Nor do officials think there is any risk that the Bank of England will be taken to court for illegally helping the government to finance its deficit.

It was all, said the governor, a "fuss about nothing".

Perhaps, but the FT's Chris Giles did confirm one clear implication of last week's policy change. It has made it hard to answer the following simple question: how much money has the Bank created by quantitative easing?

Is it the £375bn the MPC has officially voted to create since 2009? Or is it closer to £410bn - £375bn plus approximately £35bn of the Bank's money which the Treasury will spend over the next 10 months as a result of the policy change, which the MPC chose not to offset and the governor agrees will have the same effect as more QE?

It's a puzzle. But in practice, I suspect the MPC will continue to refer to the £375bn figure, leaving nerdy journalists to add the footnotes (sigh).

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 469.


    In the real world, where the bigots do not live, all customers and suppliers need to be cultivated - it is simply an insane policy to deliberately make trade more difficult and particularly stupid to do so with ones major trading partners. Yet this simple and essential idea entirely escapes the anti EU bigots!

    But these crackpots can still do immense damage to the country.

  • rate this

    Comment number 468.

    Well said D. Lilley.

    The EU flash estimate is in line with markets expectations and our economic forecast," per the commission.

    Data for UK is worse than expected, GDP shrinking 0.7% to the previous 3 months and by 0.8% compared to the same period last year.

    l suggest that Germany's figures be quietly re-assessed for significant error.

  • rate this

    Comment number 467.

    What a relief, I remember pre-2008 how the BOE would continuously tell us that the economy was growing and the chancellor told us that we'd broken the economic boom bust cycle. Everyone was buying houses many times their income and driving massive SUV's. That was scary, the realisation that the economy is in trouble and that we are in a massive global bun fight that's just realism.

  • rate this

    Comment number 466.

    It is no surprise, and indeed should have been trailed by the media, that the BoE would return the interest to the Treasury, as this is what is done in the US and Japan.

    Mervin says the £35b will have the same effect as QE. It has a better effect as it reduces the national debt without additional QE.

  • rate this

    Comment number 465.

    The growth antithesis ~

    Steady state economicals ~ virtually any risk assessment of economic implications inherent to Greece would simply recommend paying off 60% of its debt now and swallowing the loss. Spain and Italy are coming next. Portugal, Cyprus and Belgium also.

    It's a loaded deck.

  • rate this

    Comment number 464.

    The 5th Global Economic Symposium (GES) began at the Real Astoria Hotel, Rio de Janeiro, Brazil, Monday evening. During two days, more than 600 high ranking business people, policymakers, scholars, and civil representatives from 5 continents and many countries who have registered to attend the GES 2012 at the Hotel Windsor Atlantica in Rio will seek to find solutions to urgent global problems.

  • rate this

    Comment number 463.

    455 ~ Bust to boom, that is the message holding sway from them up top, who are voted in by investors.

    CEO's gang up on govt they don't like and put the boot in, but note ~ not a word or peep even to the previous Sarkozy who was on their side. The game goes on. These CEO's are getting themselves up for the National Razor.

  • rate this

    Comment number 462.

    It was intervention on a massive scale by governments and their central banks that saved the world economy from complete meltdown in 2008
    A continuation of similar policies would have prevented the appalling situation we are now in as outlined by Steph in her article.
    There is no alternative.
    The real economy, jobs and production should have priority over featherbedded financial sharks.

  • rate this

    Comment number 461.

    @460 J_f_H
    Every now & then you come up with a sensible post but now this spoils it!

    Do you really believe that every EU business that buys from the UK would immediately stop doing so if we left?

    And do you really believe that an EU without the UK would refuse to sell anything to us when outside?

  • rate this

    Comment number 460.

    Cath33 " Personally I think our only hope is to leave the EU"

    You started so nicely with an understanding of the Depression then you spoilt it by proposing a nonsensical idea.

    We need our customers and suppliers and to propose to needlessly throw away most of them is little short of daft.

    If we silly enough to follow your idea the depression will go on for another decade more.

  • rate this

    Comment number 459.

    "What you need at the BoE are some bankers. A mix of different sectors..."

    Probably. But people must be appointed on merit, not merely on the basis of the Oxbridge college tie. The chinless wonders are destroying the British economy. They don't do much harm in boom times but they cannot cope with real problems. I shudder to think real world issues are in their hands.

  • rate this

    Comment number 458.

    The UK economy has been stagnating for the past 5 years and this is going to carry on for the next 20 years - in my unprofessional opinion..

    Get used to it and move on. We have to start living within our means. There is a massive gap between our exports and imports so we are slowly getting poorer. Personally I think our only hope is to leave the EU.

  • rate this

    Comment number 457.

    SF: 'It's a puzzle. But in practice, I suspect the MPC will continue to refer to the £375bn figure, leaving nerdy journalists to add the footnotes (sigh).'
    Steffie, please investigate what has happened to the last tranche of QE - where has it reached?

  • rate this

    Comment number 456.

    Celebrity job swap
    Mystic Meg

  • rate this

    Comment number 455.

    453 ~ To my mind, the world of private finance and that of government have merged and obfuscated decision making. Finance, that is private banking is not economics, what the Troiks indulge in today is not economics but banking practice. Budgeting nations is not banking.

    What is going on is ae insidious, dangerous and repulsive as 20th century communism and is not a practice of freedom or decency.

  • rate this

    Comment number 454.

    @441 DiUSA
    What you need at the BoE are some bankers. A mix of different sectors; clearers, merchant, building society, brokers plus one or two chartered accountants who know the auditing regime inside out.

    Give the BoE power to regulate AND inspect without notice.

  • rate this

    Comment number 453.

    47 40 ~ The Basel Accords were seriously flawed in so many ways, and a significant cause of financial mayhem. The problems were created by the modern accounting rules which manipulate balance sheets. There lies the very clever problem of asset inflation.

    Banks individually managing risk by Capital requirements is significantly flawed thinking and invites disaster by leveraging stupidity.

  • rate this

    Comment number 452.

    So QE is working then if even BoE/MPC see no growth?
    Good job treasury pensions are invested in index linked funds while lesser mortals pay/pensions are outstripped by inflation!
    Inflation above target for 3+ years still devaluation is the real shell game just don't tell the public who have no vote or say in who holds these appointments.

  • rate this

    Comment number 451.

    Chances of a surprise upturn = 0
    Chances of another crisis/war/euro crash/political unrest 100%
    MK is still hopelessly optimistic.

  • rate this

    Comment number 450.

    On "chinless Oxbridge types"

    I am in, but not from, the USA. I am British and well-placed to have experienced years of rubbing shoulders with the chinless wonders from Oxbridge.

    The US has a different type of selection of the elite that is not always that good. But its net is cast wider than the UK's and I think the quality is generally higher.


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