The Bank of England’s upgrade of its 2021 forecast last week to the highest rate in almost 70 years disguised a more gloomy assessment than previously of the UK’s economic performance for this year and next, according to Financial Times analysis.
The strong upward revision of the annual forecast for 2021 from 5 per cent to 7.25 per cent was based entirely on better-than-expected past performance helped by the resilience of the economy since the second wave of coronavirus hit in November, according to the details of the BoE forecasts.
The FT found that the bank had downgraded its outlook for economic growth for each quarter until the end of 2022.
The analysis supports the position of Andy Haldane, BoE chief economist, that his colleagues on the Monetary Policy Committee have been too gloomy about the recovery from the pandemic with the danger that inflation rises rapidly, becoming problematic by the end of the year.
Last week, Haldane dissented from all the other eight MPC members by voting to limit quantitative easing this year. He made it clear that he thought that stronger past performance of the economy since the second half of last year would also result in better future performance.
Explaining his views in the minutes of last week’s MPC meeting, the chief economist wrote: “There was now clear evidence that the economy was growing rapidly, with both household and company spending surprising significantly and persistently to the upside, and consumer and business confidence bouncing back.”
He warned that “there were good reasons for believing this strength in domestic demand would be maintained, including by the running down of the large stock of accumulated savings, leading to a larger and more sustained period of excess demand than was incorporated in the May central projections”.
The FT’s analysis found that the forecast signed off by the majority on the MPC contained some odd features, which were not highlighted by governor Andrew Bailey when he explained the BoE’s thinking last week.
Bailey did not explain at the time that the entire upgrade of the annual growth figure was accounted for by a change of the central bank’s view of the past. Nor did Bailey highlight that the bank had become more pessimistic about growth prospects.
The bank scaled back the likely bounce in growth, despite the recent Budget pumping more money than previously assumed into the economy and evidence that businesses were bringing forward investment to take advantage of the super-deduction in corporation tax. Moreover, the BoE’s forecast had factored in a greater amount of spending by households of savings accumulated during lockdown than previously assumed.
But during his news conference, Bailey gave the impression that the new forecasts were more optimistic for quarterly growth than the previous iteration. “Demand growth is boosted by a decline in health risks and a fall in uncertainty, as well as fiscal and monetary stimulus,” the governor said.
The FT analysed and compared the February and May forecasts and found that the BoE had revised them down for the second quarter of the year by 0.9 percentage points and by 0.65 percentage points in both the third and fourth quarters. The growth forecasts were also revised down slightly for the whole of 2022.
The BoE and Haldane declined to comment, but the chief economist is expected to outline his more optimistic view before he departs the central bank at the end of June in either a speech or in an appearance before a parliamentary committee.
So far, Haldane has remained diplomatic. Last Friday, he said the “triple whammy” of the 2008 financial crisis, Brexit and the coronavirus pandemic had hit the economy hard, but was now “approaching the point at which all three uncertainties are dissipating”.
Figures for the first quarter on Wednesday are likely to confirm economists’ view that the lockdown this year was far less damaging to activity than the initial closure of the economy last spring.
Haldane’s view suggests that the resilience shown by consumers in the first quarter reflects a pent-up desire to spend and if this continued over the summer, it would threaten to take inflation considerably above the BoE’s 2 per cent target later this year.
Haldane warned that bottlenecks in supply chains alongside rampant consumption “posed upside risks to meeting the inflation target over the medium term”.
Many other economists are also beginning to show concern about a re-emergence of inflation as the recovery continues.
Neil Shearing, group chief economist of Capital Economics, said that “all the ingredients for a rise in inflation are there”, but he added that the evidence suggested that the UK was not likely to be hardest hit. “There is much greater scope for a rebound in inflation in the US than in Europe or Japan,” he said.
Haldane also recognised on Friday that there was still much uncertainty over economic prospects and a rapid recovery over the summer was not guaranteed.
But most economists are revising their forecasts sharply higher, with Goldman Sachs expecting almost 8 per cent growth this year.
Some, however, remain more cautious. The National Institute of Economic and Social Research published forecasts on Monday that were considerably more pessimistic than the BoE’s, with a slow recovery, stemming from a more pessimistic view on exports and business investment.
It expects households to be more cautious and not rapidly increase the proportion of their incomes spent back to pre-pandemic levels. Jagjit Chadha, director of NIESR, said: “We don’t see such a rapid case for growth.”