‘Markets don’t like chaos’ – experts debate Brexit watch data – The Guardian
Professor of economics at Dartmouth College, New Hampshire, and member of the Bank’s monetary policy committee from June 2006 to May 2009
It was a surprise that the vote on the MPC was 5-3 to keep rates constant. Markets hadn’t expected so many votes for rate rises. On the same day as the vote was published we had very weak data on retail sales, which suggests that rising prices, which were higher than expected, are continuing to reduce living standards. Retail sales volumes dropped 1.2% in May, a deeper fall than the 0.8% forecast by economists. Oops!
It seems to me that the three votes for a rise were in error. Indeed, it is clear that every vote for a rise since 2008 has been a mistake the economy could not have handled. Chances are the next move will have to be a cut. It matters to the central bank and all of us that there is no credible government and no dependable fiscal authority. We have no clue what economic policies the government will implement and whether failed austerity is dead and buried. It should be.
Other post-election economic data have not been strong. The pound weakened on the election news. The Markit/CIPS UK purchasing managers’ index for services missed expectations as a squeeze on household incomes began to make itself felt at consumer-facing businesses. Sales of new cars to private individuals were down 14%. It was the second month in a row that total sales were down after a record March when there was a rush for new cars before tax changes on vehicle emissions. Plus, the Bank of England’s agents’ summary of business conditions suggested that “heightened uncertainty remained a drag on some businesses’ willingness to invest”. They found that growth in total labour costs had remained subdued across sectors. Steady as she goes isn’t what is happening.
It will help that oil prices are tumbling again and have entered a bear market, which will lower inflation. Brent crude on Thursday had fallen below $45 a barrel, compared with less than $43 for West Texas Intermediate crude so, thankfully, inflation is set to moderate and pretty quickly.
Markets don’t like chaos.
Senior economic adviser at the PwC consultancy and member of the Bank’s MPC from October 2006 to May 2011
Brexit discussions have started this week, but the impact of the EU referendum result on most households in the UK has been to squeeze both their incomes and spending. Inflation has risen because of the weakness of the pound and that has turned real wage growth from positive to negative. That, in turn, is squeezing consumer spending – which we are seeing reflected in sluggish growth in retail sales. Employment growth continues to be quite robust, however, so that offers a countervailing positive influence on the prospects for consumer spending.
The world economy looks very resilient, though, and that is going to help the UK economy avoid the worst effects of the current squeeze on consumers. The three main regions of the world economy – North America, Europe and Asia – are growing at a reasonably healthy rate. That will support export growth and help the financial position of the many international businesses that operate here in the UK, giving them a breathing space to assess the full consequences of the Brexit outcome.
The net impact of these forces will be to create a modest slowdown in UK economic growth – to 0.2% to 0.3% a quarter. That will drag the average GDP growth rate for 2017 down to about 1.5%. In 2018, we should see a similar consumer-driven squeeze, offset by reasonably healthy world growth, with average economic growth also close to 1.5%.
With inflation pushing up towards 3%, however, it is reasonable for members of the MPC to question whether they should follow the US Federal Reserve and start pushing up interest rates. Three MPC members voted for a rate rise in June, the highest number since 2011. The Bank’s chief economist, Andy Haldance, has suggested he might be sympathetic to a rate rise. So the interest rate climate in the UK may now be shifting to the upside, despite the slowdown in economic growth.