LONDON (MNI) – Turning to the macroeconomic outlook, Broadbent
warns against getting “too fixated” on whether the UK economy enters a
technical recession over Q4 and Q1. The big picture for the MPC is that
output at present is stagnant and spare capacity in the economy is
likely growing.
But Broadbent sees some positive economic developments emerging
over the course of 2012 which make a pick-up in the economy in the
second half a reasonable forecast. In addition, the European Central
Bank’s recent actions have lessened the downside risks further out.
The BOE’s November forecast that “output across Q4 and Q1 would be
broadly flat is not going to change,” he says.
“It is clear that the economy is broadly flat and therefore growing
less than its potential rate and that therefore – somehow measured and
broadly speaking – the degree of spare capacity is probably growing”.
“If you look at the combination of hard data and surveys over the
past 6 months – they have been weaker for Q4 but then marginally
positive for December,” he adds.
Broadbent warns that the quarterly pace of economic growth in 2012
is likely to prove volatile.
“It will be quite higgledy-piggledy – if I had to guess, this is
not a forecast – there are other factors going on as well. In Q2 we have
the Jubilee and the Olympics in Q3, so we could quite possibly see
down-up-down-up – we have to look through all of that quite honestly,”
he says.
Since the November Inflation Report, the growth outlook has not
changed radically in either direction.
“I would say very, very near term (output looks) slightly weaker.
In the slightly less near term Q1 is marginally stronger. Over six
months, the downside risks have been lessened slightly – partly because
of what the ECB has done, partly because of QE itself and you can see
that in risk asset markets – quite clearly.”
Whatever the short-term relief brought about by the European
Central Bank’s policy actions, notably the new long-term repo,
underlying competitiveness and current account imbalances within the
Eurozone have not been addressed.
“Looking much further ahead, these risks are still there,”
Broadbent says.
Still, the ECB’s actions have bought time for a more
root-and-branch reforms to be put in place.
And domestically there are some positive, or rather, less negative,
impulses coming through the pipeline, Broadbent points out.
“One is that household income growth will improve because you are
losing that base effect from oil and various other things. It will
improve quite a bit through the second half of 2012 and the other thing
that is worth pointing out is that the degree of fiscal tightening,
whatever the precise impact you think it has, is falling”.
That means it is still “reasonable” to expect some pick-up in
growth in the second half of 2012, he says, although there could well be
a “hiccup” around the middle of the year.
The most dangerous risks to the UK economy still emanate
“overwhelmingly from continental Europe,” and this was the “main reason
why growth has weakened in the UK since the middle of last year,” he
said.
But the latest Eurozone developments, with some improvements in
financial markets, do mean that the MPC has not seen what “we most
feared”.
Broadbent says he has been “reassured” that the high headline
inflation rates seen in the UK in recent years have not undermined
inflation expectations. The BOE has successfully safeguarded the
credibility of its inflation target.
Measures of inflation expectations derived from financial market
pricing – his preferred barometer – and surveys of consumers give no
indication that expectations have lost their anchor.
“I have been positively reassured that that has not happened,” he
says.
Break-even rates are at levels “perfectly consistent with inflation
being on target over the medium term” and even consumer surveys show no
“great dislocation of inflation expectations.”
“I am not trying to downplay those risks, I am simply saying I
really don’t see the signs of it in actually what matters”.
Gilts and sterling have also behaved well compared with periods
when no such policy anchor was in place, such as the 1970’s and 1980’s.
Broadbent adds that the big and continuing falls in headline CPI
inflation should also help maintain inflation expectations.
There will be “a lot taken out of inflation” by March, with the
latest data showing headline CPI dropping to 4.2% on the year in
December, down from 4.8% in November.
“It’s pretty hard, given the power of these base effects which
you’re already seeing – we are already off a percentage point at the top
– not to see further reductions of that and possibly a little bit more
over the next few months,” he says.
Recently announced cuts in domestic gas prices should also help
bring CPI inflation down “at the margins” – but he adds that it is “not
clear if they will do much more than 10 basis points”.
Still, “they go in the right direction and they help.”
Broadbent was sanguine about the impact of fiscal austerity on
economic growth on the economy when he joined the MPC in June 2011,
anticipating there would be some ‘crowding-in’ of private sector
economic activity as output shifted away from the government to
the traded sector.
This has not proved as smooth as the history of similar fiscal
retrenchments would suggest.
“That process may have been hampered by the financial system or
massive risk aversion or a sclerotic banking system that mean this
reallocation was a lot harder” and this “may be linked,” he says, “to
why we have had weak productivity growth.”
“In that sense I am less sanguine about the impact of fiscal
austerity,” he says, even while he fully recognises it had to happen.
–London bureau: +4420 7862 7492;
email: drobinson@marketnews.com/dthomas@marketnews.com
[TOPICS: M$B$$$,M$$BE$,MT$$$$]
