Bank of England bosses celebrate a quiet triumph
Why is the Bank of England so chirpy? Well, relatively. Anyone who heard the Governor, Mervyn King, talk about the “choppy” recovery and his warnings that the return to normal conditions would take many years, would never mistake him for a ray of sunshine.
The Bank did in fact downgrade its growth forecast for next year from about 3.5% to nearer to 3%, which is significant enough.
Nonetheless, for some reason the Bank is much more optimistic about the immediate chances of the economy reviving than most financial commentators, including the IMF which thinks we'll see growth of 2.1% next year.
There isn't much difference in the bands of probability that the two organisations place on future outcomes.
But a health warning is required here — the Office for Budget Responsibility (OBR) bands are not true predictions in an economic sense — they are merely based on the range of |errors in past Treasury forecasts.
So they do not represent any kind of mature judgment about where we're headed, although their central forecast does, and the Bank's fan chart represents the whole gamut of possibilities. In both cases they are extremely wide, reflecting both the scale of past errors and the huge uncertainties facing policymakers.
Anyway, unlike the OBR, the Bank doesn't explicitly produce forecasts for the various bits of the economy or aggregates in the way that the OBR (and the Treasury used to). So we cannot know in mathematical terms whether the Bank's bullishness is down to different assumptions about, say, the response of exports to changes in sterling, or what they think wage rises will be. Here is a case for the Bank to mirror the OBR's new culture of transparency by releasing more of that type of data.
Still, so far the Bank seems to have had the better touch. While their forecasts for inflation have been woeful, the growth forecasts have been much more accurate. The Bank understated the extent of the slump last spring, but has been pretty bang on with the pace of recovery ever since. By erring on the upside they have kept up with the tendency of the GDP data this year to surprise to the |upside, most dramatically with that 1.1% growth rate recorded in the second quarter, twice the pace predicted by City economists.
The fact that the Bank has been so eerily accurate on growth makes it odder that its inflation predictions have been so awry. It suggests that the two — GDP growth and inflation — aren't two sides of the same coin after all. As deputy governor Charlie Bean and chief economist Spencer Dale have hinted, the accepted relationships may have altered during this recession as firms seek to hold prices to boost their sterling-terms revenues, profitability and cash flow and, ultimately |secure their survival.
I suspect the Bank's (relatively) bullish outlook may be partly framed by expectations about exports.
Another reason why the Bank thinks things will get better, faster, seems to be a more balanced view of the impact of the emergency Budget in June.
Bank Governor Mervyn King stressed that the potentially calamitous outcome of a sovereign debt/ financial crisis has been avoided by the Chancellor's pre-emptive actions.
Critics argue that the danger was exaggerated, and they may be right. But even if it was, the idea that the UK might be unable to support its financial and payments systems for lack of funds – and with no more stopgaps to reach for — is a truly terrifying one.
The chances were small, but the consequences would have been devastating.
The removal of that downside risk — at least for now — is obviously prized by the Bank in another quiet, almost unseen triumph.