The Bank downgrades growth forecasts


          Amidst all the UK turmoil on the streets, world markets have continued to plunge on the back of fears about banks, government debts, and slowing growth.

          So far markets have believed the UK government’s oft stated intent to get the deficit down and to control its finances. The UK government can now borrow at some of the lowest sovereign interest rates in the world. No-one doubts the UK’s commitment to meet all the payments, or her ability to do so.

          That good news does not mean the UK economy is running to plan.  The Bank has been forced into yet another reduction in its forecast growth for 2011 and 2012. Slowdown in the USA, turmoil in Euroland, and attempted slowing in the emerging economies, make an export led recovery that more difficult. The Bank has also drawn attention to the big squeeze on real incomes in the UK, a squeeze made far worse by the Bank’s failure to keep inflation down to the target level or anything like it. This squeeze cuts domestic demand.

             The Bank’s figures for the first quarter of 2011 show that the public sector contributed a positive 1.1% to growth. The government increasd public spending significantly, leaving it growing more quickly than inflation. The extra money needed was all borrowed. The private domestic sector cut output by 2%, thanks to the real income squeeze. The overall positive outturn came from net exports added to the public  sector. Net trade contributed plus 1.4%, giving overall growth of 0.5% despite the large fall in the domestic private sector.

            So the UK economy followed a course  rather different from that described in much of the media. Public spending and borrowing added to output, the private domestic sector subtracted from output, thanks to inflation, tax increases and the debt overhang.

              Looking forward, the OBR and the Bank are now saying there will be less output and therefore less tax revenue in the early years of the 5 Year Plan. The government has to decide whether this is a temporary phenomenon, allowing them to borrow a bit more and await fast growth in the second half of the period, or whether it is likely to persist. If the latter, then the government has to look again at the way it is going to get the deficit down.

               Either way, it would be wise for the government to go easy on hiring new staff, on adopting new projects or signing up to new commitments. This is not a good time to expand spending further. It would give the government greater flexibility and more protection if spending started to undershoot targets.

               For every 1% undershoot on the growth forecast the government will lose around £6 billion of annual revenues. If the government loses 1% of growth this year, and does not recoup that, it will lose more than £25 billion of revenues over the Parliament and the period of the recovery plan.


  1. lifelogic
    August 12, 2011

    You say “The UK government can now borrow at some of the lowest sovereign interest rates in the world.” – Good, just a shame they choose to borrow it mainly to waste it on HS2, pointless wars, the Olympic white elephants, green house bling subsidy, propaganda, ineffective policing and politically correct equality nonsense.

    It is also a shame that many good businesses cannot borrow at all (or at reasonable rates) and that government owned RBS and many other banks are spending so much of their efforts pulling back funds from sound businesses and ripping them off.

    Confidence is what is needed, a leader who looks like he intend to cut this nonsense expenditure and over regulation rather than just say he will and then do nothing.

    So far his performance has been pathetic in the mode of Ted Heath. The riots, encouraged and incubated – initially by incompetent police management from the top (a do nothing approach) has made things even worst.

    A government with Vince Cable in as the anti business secretary can never inspire much confidence. Only 3 and a bit years left till the election now and nothing so little positive done so far.

    1. lifelogic
      August 12, 2011

      “The Bank’s figures for the first quarter of 2011 show that the public sector contributed a positive 1.1% to growth.”

      How much will this government “investment” (or waste) reduce the real, long term, growth (and the future tax revenues) in the private sector – perhaps by 10% I would think – as governments usually spend so pointlessly and inefficiently.

      4% inflation and 50% tax rates mean you now need to earn nearly a 10% return just to keep your money worth the same.

      So usually best to invest it elsewhere – that is the Cameron message to potential investors. Re-enforced by his, government owned and other non lending or very big margin and fee banks.

      1. Fiona Maddock
        August 12, 2011

        4% inflation? I should cocoa! (and that’s doubled in price too). You go round ASDA and try and find any foodstuff which has only gone up by 4%. Most grocery items have increased in price by 25%, or 30%, or 100%. Yes, that’s right. For example, a pack of ground coffee which until last year used to cost, let’s say £3.00, for 500 grams, or £5.00 if you like, is now the same price for 250 grams.

        1. electro-kevin
          August 12, 2011

          Tinned and jarred food in particular. Not only has the price gone up but in many cases the quality appears to have gone down.

          Not all inflation can be measured.

    2. lifelogic
      August 12, 2011

      I see France, Spain, Italy and Belgium have imposed bans on short-selling from today to stabilize markets after European banks including Societe Generale SA hit their lowest level since the credit crisis.

      Do these government understand nothing about markets? Could they not just concentrate on some real solutions to this crisis they created instead of this banning idiocy ?

      1. javelin
        August 12, 2011

        Banning short selling often has the opposite effect – it makes the market less liquid and more volatile. The truth is there was VERY little short selling of Euro banks. People are bailing out the sector and trying not to upset the apple cart and cause a crash then losing on their other shares.

        You can short these shares in London and NY anyway. Traders will just move their business else where. I think by the day end the market will take these measures to show at the very least nervousness by the Euro core Governments.

        The general state of the market is psychologically “autumnal” – that is to say I think there is a deep feeling that we are still heading to the darkest part of winter (a solstice) before spring will come. The maths is that Governments are insolvent and its just financial engineering on a massive inter Governmental scale stopping a default. I think this ancient psychology is driving the markets at the moment and we’re all just waiting to see how the default will happen.

        Reply: As someone who personally never shorts a share, I agree that this ban is a sign of weakness and will not work. It does shift this type of business elsewhere. In the collapse of 2008 bank shares were taken down by their owners getting out, as well as by traders shorting. Someone shorting has to buy back. Someone selling soemthing they own does not have to buy back.

        1. zorro
          August 12, 2011

          ‘Shorting’ is a useful discipline in a capitalist economy. It shakes out the bluffers.


          1. lifelogic
            August 12, 2011


          2. Acorn
            August 12, 2011

            It certainly shook out the (people-ed) that were running Enron!

        2. Tedgo
          August 12, 2011

          I don’t understand short selling, that is what is the advantage to the insurance company and pension funds clients.

          Said insurance company or pension fund lends shares to a greedy investor for a fee. Greedy investor sells the shares and watches value of those shares fall.

          For the shares to fall the greedy investor has to sell enough shares or work in concert with other greedy investors or spread rumours or take advantage of a fragile market.

          Greedy investor buys back shares at a lower price, to cover fees paid and make a useful profit, and hands them back to the insurance Company or pension fund.

          Next day insurance company publishes that the value of your equity pension pot has fallen 18%, like mine has over the last few days.

          Alternatively, with a company pension fund, the pension trustees go cap in hand to the company directors complaining that their is a massive hole in the pension fund and that the company needs to pump in millions more.

          Sounds like fraud (or looting) to me.

          1. lifelogic
            August 12, 2011

            Not at all in effect one party thinks the shares are going to go up in say a month or two the other down. They do a deal between them. One wins one looses what is the problem it is up to the buyers and seller to make a judgement. Those that get it wrong loose out. No one is forcing them.

          2. StevenL
            August 12, 2011

            The pension fund is holding the stock for the long term, maybe even for decades. Share prices do not affect the profit and loss and balance sheet (or should not) of a company.

            The short seller is usually just a short term speculator.

          3. Tedgo
            August 12, 2011

            Lifelogic – I agree with what you say if you trade the shares you own yourself, but if a insurance company or pension fund lends the shares to a third party, so the third party can make a profit, then the returned shares will have a reduced value. One can only assumed that managers who let this happen are getting a backhander.

            Reply: Share lending pays a fee to the organiser of the lending and to the ultimate owner of the shares. That’s why they do it. It’s not backhanders – it should all be disclosed fees.It is a rational thing to do for the lender if a) he thinks the person borrowing the shares is wrong and they will stay valuable and b) he is protected with collateral/guarantees etc. Lots of things in financial markets are not corrupt – they are different people placing different bets or expressing different views on what will happen next. They do not know in advance who will prfoit and who will lose. All investment is a kind of bet, a venture into an uncertain future, which may or may not work out.

          4. Tedgo
            August 12, 2011

            I understand that pension funds are for the long term and if you are in a final salary scheme, investment details do not matter that much to the individual.

            But most people are now in money purchase schemes and all too soon that long term becomes tomorrow, when they have to convert to an annuity or move it somewhere safer. On that day your share of the equity pot is the summation of all the shares which have gone up and down by more natural means minus the shares value which has been artificially given to accommodate the short term speculator.

            Yes I do understand the fees, but the short term speculator is not going to stay in business if the fee is a substantial proportion of the shares loss in value, that is the speculator profit.

        3. StevenL
          August 12, 2011

          Jav, a few weeks ago when you were on about Italian debt, I thought to myself shorting French banks was the obvious response. It was pretty obvious that the authorities would ban it and you would risk getting bankrupted in a short squeeze too!

          After the VW/Porsche thing and the first short selling ban, there are very few circumstances where I would short an individual stock.

      2. javelin
        August 12, 2011

        Interesting the new short trading rules on French, Italian, Belguim bonds – have been written in a “cac” handed way and the European Securities and Markets Authority (Esma), have created confusion in the markets.

        They don’t give a full list of instruments – so for example does this include repos for example? Are they a derivative or not? What is the difference between an underlying and a reference? Securities can be considered shares, but also loans. There is no legal definition here to work with.

        In Austria:
        “This includes equities as well as all equity derivatives (options, futures, convertible bonds, CfDs, for example).”

        In Belguim:
        “securities that have been sold, or of the securities to which the transaction in derivatives relate.”

        In Bulgaria:
        “securities that are subject of margin purchases and short sales, namely to disseminate on a daily basis through the stock exchange’s”

        In Denmark:
        “person en-tering into the agreement 1) does not own at least the number of shares,”

        The French (securities regulator) say something spectacular
        “No, investors are not allowed to use derivatives to create a net short position;” “an ‘investor’ is a natural or legal person established or residing in France or in another country.”

        They don’t mention instruments or exchanges … s0 just a global worldwide ban for everybody then !!

        I think I’ll stop there except to say that completely predictably the EU have said they should have co-ordinated it by having a central framework and control of all financial regulation in Europe …

        Basically they are saying no one in the world is allowed to short !!

      3. Gary
        August 12, 2011

        Shorting paradoxically puts a floor under the market because shorts have to cover. They have removed the floor
        They don’t know what they are doing

    3. lifelogic
      August 12, 2011

      It was reported today that university students will end up with average debts of perhaps £54K on graduation. Are very many University degrees actually worth this I wonder? I would have thought not, perhaps as few as 2o% of them actually are. With tax, NI and the inflationary/interest charged they might each have to earn perhaps as much as £200,000 over their lifetime just to repay this debt.

      Some may well only earn as little as £1.2M anyway (and that before tax) over their whole lifetime from which they and their families have to live for perhaps 60 years.

      Meanwhile at the other state sector, end at the BBC, I see it is reported that Caroline Thomson the corporation’s chief operating officer at the BBC spent £3,880 on cabs in just three months – one wonder with all this time in taxis how she found enough time left to organise the usual left wing, big state, pro green, pro EU output of the BBC.

      Her salary and bonus is reported as £274,000 and I assume a huge pension too for (a rather large number of the licence fee payers) to pick up.

      1. David Price
        August 13, 2011

        The full real cost is likely far, far more than the 200,000. People should be encouraged to provide for themselves when they retire where the best and most effective time to start is when they are young so the magic of compounding has time to take full effect. By loading up debts at the beginning of their working and investing life fewer of the young are going to be able to provide effectively for themselves later on.

        They will become dependent on state aid later on if not immediately since jobs are few and far between.

        You have to question the real motivation and thinking behind the action of the last government in getting rid of polytechnics and raising the status of hairdressing courses to degree level. These bits of paper were worthless at 3K a year, hopefully a rate of 9K should force people to consider the actual worth of what is being offered.

        As for the BBC, if it became a subscription service I wouldn’t care as I would have a choice whether to subsidise the luvvies lifestyles or not. As I don’t I do care. I no longer frequent the BBC website and the junk they put on the box is not worth the tax. Radio 4 and 7 should stay, the rest can go.

        Privatise the BBC and make sure all current assets are monetized as debt returned to the taxpayer.

    4. outsider
      August 14, 2011

      Can’t help feeling that the reason why the UK government can borrow at low rates is mainly because most of the new debt is either bought by the Bank of England or by banks that are effectively forced to do so by the Financial Services Authority, presumably to stop them wasting their money on smaller firms. This process will need to continue if slow growth keeps the annual deficit inordinately high, creating its own little vicious circle.

  2. Mike Stallard
    August 12, 2011

    Now let me see…..In order to pay for the burgeoning Welfare State, whose results are only too obvious in UK at the moment, the Chancellor is depending on more people producing more stuff.

    Since ordinary people are simply too cowed by the bureaucracy, the tax system and now civil unrest, he is borrowing money to pay people in the Civil Service and so on to “produce” more.

    Have I got it right?

    1. lifelogic
      August 12, 2011

      Yes you have.

      1. zorro
        August 12, 2011

        It is called socialism.


  3. Antisthenes
    August 12, 2011

    George Osborne’s proposed attack on employment laws is a step in the right direction. More of the same in other areas where red tape and nonsensical taxes (green taxes and polices to name just one) would do wonders for the UK economy and competitiveness. Of course nothing substantial will actually be achieved the EU and vested interest will see to that.

    1. lifelogic
      August 12, 2011

      What proposed attack on employment laws? Everything I have seen is making matters even worse like the agency worker proposals and the no retirement nonsense.

      1. Bazman
        August 13, 2011

        The race to the bottom continues. A race that cannot be won. What next? abolition of the minimum wage? Or at least no rise in the future.

        1. lifelogic
          August 14, 2011

          Your approach is the race to the bottom and yes the minimum wage should go. Many people are not worth it on day one until they have learnt how to do the job then they may earn more. They won’t learn watching TV.

          1. Bazman
            August 14, 2011

            Interesting to see where the country would be without the minimum wage and European immigration policies. Millions of people working for nothing with millions more unemployed because quite rightly will not work for nothing with the state getting nothing paying out more benefits subsidising company profits. Who do you expect to work for less than six quid a hour? Yourself or just desperate people? Read my comment on living costs in Energy Prices post.

  4. norman
    August 12, 2011

    At least some good news out of the riots though – ready made excuse for next quarters poor growth figures.

    Following wintery weather in winter and summery weather in summer the boffins must have been scratching their heads what to come up with next time but no need to worry now!

    1. electro-kevin
      August 12, 2011

      Self defence classes and baseball bats should privide us with new growth industries.

  5. Peter Campbell
    August 12, 2011

    “No-one doubts the UK’s commitment to meet all the payments, or her ability to do so.” ?? Really, then they should. The UK shows all the commitment of a drunken sailor. It continues to borrow and spend recklessly whilst inflating the debt away and thereby stealing from investors and anyone else unlucky enough to hold sterling.Trouble is we’re all so indoctrinated with the idea that inflation is normal it allows government to get away with it.
    “The Bank’s figures for the first quarter of 2011 show that the public sector contributed a positive 1.1% to growth.” The public sector never contributes to growth. It can only steal from the private sector now through taxation or from the future private sector through borrowing. The drop in private sector is because of the growth in public sector.
    All the problems in the economy are directly attributable to past and present government policies of which almost all are harmful, counterproductive or at best ineffective.

  6. Robert K
    August 12, 2011

    Wise and valid comments. But so long as the public perception is of cuts, it’s much easier for a government to let the borrowing tick up rather than make the nasty, headline-grabbing and difficult actions to cut spending.

  7. javelin
    August 12, 2011

    Excellent post –

    I would say it is obvious that public sector growth needs to be less that 50% of private sector growth to have a sustainable economy. That is because if tax is at 50% and is invested wisely then this should produce 50% of the growth (except 50% taxes would still be too high and Government spending is not spend wisely).

    So, on a broad brush analysis, how come we are getting 1% growth from the public sector and only 0.5% growth from the private sector – when taxes are at 50%.

    Given the 1% public sector growth we should be expecting to see a 2% growth from the private sector?

    Or, as is prudent, the Government should be providing 0.25% public sector growth based on a 0.5% growth in the private sector. (i.e. 50% of the 0.5% private sector growth taken in taxes and spent wisely) .

    So basically the Government creating 1% growth is spending FOUR times faster than the private sector can afford (0.25% growth).

    1. Robert
      August 12, 2011

      The word tax – investment – and growth should not be uttered together ! What public spending produces real growth or at the very least improves the potential efficiency of the economy?

      1. lifelogic
        August 12, 2011

        Law and order, an efficient but basic legal system for property ownership, sufficient defence of the realm, self rule, basic provision for those unable to provide for themselves and some border controls.

        Not much else does anything much that is useful for the economy. But as we see in the UK the state management is so incompetent, misguided (or perhaps corrupt in parts) that even 50% of GDP spending is unable to provide even these basic services efficiently.

        1. Tedgo
          August 12, 2011

          Perhaps we ought to privatise Government entirely, paying our taxes to our choice of provider.

  8. Brian Tomkinson
    August 12, 2011

    The focus on growth is largely related to the increased taxation that the government will receive to help reduce the deficit. In that respect how does a contribution of 1.1% to growth from public spending with borrowed money (adding to the debt and consequential interest charge burden) contribute to increased government revenues?
    If that figure had been zero then the overall growth figure would have been -0.6%. How would that have affected the revenue collected by the government? On the other side how much more has it added to the deficit, the debt and interest charges?

    Reply: The economy is dynamic, so we do not know what the private sector growth figure would have been if the state had spent and borrowed less. The important point that all types of economists can agree about is we need more private sector led growth to pay the enormous public sector bills and get the deficit down from extra revenue. So far the private sector is falling short of official forecast.

    1. Brian Tomkinson
      August 12, 2011

      Thanks for the reply. What I want to know is how does growth in public spending with borrowed money help reduce the deficit? I don’t see how it can. Am I wrong?

      Reply: No, of course it does not cut the deficit, unless it triggered tax paying growth in the private sector.

      1. lifelogic
        August 12, 2011

        In fact it nearly always triggers the reverse – far less growth in the private sector.

      2. Brian Tomkinson
        August 12, 2011

        Thanks again. So, quoting GDP growth figures, which include public sector growth, tells us little if anything about the likely progress in reducing the deficit. The question then is why do we continually hear politicians and commentators using them to do just that? Another case of bull**** baffles brains?

    2. Robert
      August 12, 2011

      That is primarily due to to conviscatory levels of taxation, huge costly regulations, and the fact domestically we have to re-orientate more to overseas markets as our private sector has to de-leverage – Tullet & Prebons report simply explains why growth from the private sector will disapppoint in the near term. It is not rocket science. My sad prediction is that GDP growth at best this year will be between 1-1.2% still below the BOE’s recent downgraded forecast. George will not hit his plan, it is quite obvious – we will need to make real cuts, not reductions in total planned expenditure. The penny will eventually drop.

      1. norman
        August 12, 2011

        I’d put real cuts in third place.

        Now that we’re, apparently, the worlds safe haven for government bonds (not that that’s saying much the way things are) the government can use weasel words (factors outside our control, whole world is suffering, things worse than we initially thought, blah blah) to borrow a little bit more and push the projected balance point out a couple more years.

        What’s a hundred or so billion more on to the pile? Tu’penny ha’penny stuff.

        I’d place the printing presses as second favourite.

        Trailing a long way behind in last I’d put that the growth figures actually match the predictions and everything goes to plan.

  9. oldtimer
    August 12, 2011

    The Chancellor`s statement sounded complacent. Consumers have yet to be hit with the full cost of the government`s ill-conceived and wholly destructive green taxes. Businesses have already drawn their own conclusions about the carbon taxes, get out or get relief. Unless and until these measures are abandoned and reversed there will be no recovery in the private sector.

  10. Caterpillar
    August 12, 2011

    (1) I know I keep saying this, and I recognise that JR has mentioned inflation (and the real income squeeze) but; the academic papers show that inflation-growth is a threshold effect. The threshold for developed nations is 1-3%, i.e. inflation below this speeds growth, inflation above this markedly slows growth. Why has the Chancellor and Government continued to allow the BoE to pursue a high inflation policy for the sake of an academic experiment. The BoE needed to act on inflation a year ago, rather than leaving it to destroy growth and gambling on a debased currency (systemic risk of gambling on world recovery and exports, cheapening the UK brand …).

    (2) Also why does the BoE/MPC have an inappropriately high view of the potential longterm growth of the UK ? Is this why it overestimates excess capacity and thus gets its policy so, so wrong? When the Business Secretary eventually cuts regulation then the long term grwoth rate might be higher, but at the moment it isn’t.

    (3) The have-it-now society is not only represented by the recent looters but by the wreckless mortgagees who would not wait and save a sensible deposit. Now the BoE promotes looting from savers and continues to give benefits (by supporting low interest rate) to the have-it now mortgagees. There seems to be a conceptual equivalence between ‘virtuous savers’ and ‘law abiding citizens’, George Osborne talked of the first but then stripped them of confidence and continued low-rate benefits to the wreckless have-it-now mortgagees, the PM talks of the second but no doubt will again strip them of confidence. The consistency of being able to recognise decency but no doubt act against it seems to be a developing characteristic of this Government.

    (4) Put interest rates up and clear the housing market, buy-to-let and 100% mortgages are back – don’t start the next bubble before this one has even been fixed. Put up interest rates so that businees that are only marginal in boom times fail, helping the efficient and innovative to grow! Put up interest rates to act on inflation and currency, giving a stable background for investment decisions. Put up interest rates to give confidence back to savers (research again shows saving is complex not a naive monotonic relationship with interest – confident savers spend), put up interest rates to put an end to the ’emergency’ situation signal.

    (5) Do not QE again to give the banks an easy route to profit by just relending to the Govt, for the system to work they need to be working for their profits.

    1. Robert
      August 12, 2011

      Totally agree with all you have said – raising rates will have the right effect as you say. I am sick of the so-called orthodox economists, they have got it so wrong yet again. The more I hear economists turn to the so-called easy solutions of excessive monetary stimulus combined with conficatory taxation it reinforces my long held view that they no nothing, not only in social and moral values have our politicians and the financial establishment got it massively wrong but also financially where they bail out the feckless and penalise the virtuous sensible and financially responsible. They have used all the usual levers , inflate, excessive monetary stimulus and they are faced with the gaping hole that can only be filled with sound money and a long period of sub-growth and the consequent massive reduction in living standards until our economy is ‘re-balanced’ into being a flexible, highly productive that creates real not notionary wealth.

      1. Mike Stallard
        August 12, 2011

        I just want to focus on you point No 1.

        If I were the Chancellor, the BoE or the PM, I would be encouraging inflation by stealth.
        Why? Well, you see, it makes every one poorer. That is what we need – seen from an organiser’s point of view. We need to reduce the hand-out culture and get people forced into work. By keeping their hand-outs the same and watching as they buy less and less, I could easily achieve this.
        Meanwhile, our crushing debt – like the reparations forced on Germany in 1919 – sink in value from “impossible” to “very easily met” if the pound sinks low enough.
        The trick, of course, is to do it over a period of about 10 years and that is exactly what is happening.

        Shame about OAPs with savings, but there you are. (etc-ed)

        1. uanime5
          August 12, 2011

          The problem with this is wages aren’t rising, so those in work are buying less and less. This causes the domestic market to shrink and hurts the private sector.

        2. zorro
          August 12, 2011

          But surely this has been crystal clear from the start. Do not believe what they say, look at what they do.

          All the talk about interest rates rising….nonsense – it was clear that they will keep ZIRP as long as possible to keep on spending (government). There WILL be a QE2 and possibly QE3 in 2013/4 when growth is anaemic and DC wants to get re-elected.

          Inflation will be 2% in 2 years time – Right, how many times have they said that…..

          Inflation will be over 5% for the rest of this Parliament and beyond by hook or by crook to deflate the overall debt in real terms and keep house prices from tanking…(By the way I do not agree with this, but this is what will happen)…Now, who wants to ‘short’ that scenario?


          Reply: As a strong critic of past Bank of England policy and failure to control inflation, I do think they are right in saying it will fall next year. As VAT drops out, and commodity prices fall as they are doing at the moment, so UK inflation will fall.

          1. David Price
            August 13, 2011

            Re: John’s reply – aren’t commodity prices dropping because demand is dropping. In which case where does the hoped for growth come from?

            I agree with Zorro that inflation will be managed up rather than down. It seems far too easy a lever to use to reduce effective debt, particularly if there are declining tax revenues and the government refuses to introduce real and meaningful cuts.

          2. Caterpillar
            August 13, 2011

            Re: JR’s reply.

            December 2003 CPI 97.5
            January 2008 CPI105.5
            June 2011 CPI 119.4

            equivalent annual rate from Dec 2003 to Jan 2008 ~2%
            equivalent annnual rate Jan 2008 to June 2011 ~ 3.7%

            To achieve an annual rate of 2% by Jan/Feb 2012 CPI will need to remain at (/return to 119.4) since 119.4/1.02 = 117 (Jan2011 CPI was 116.9). Suggestions of peaking at 5% later in year imply CPI greater than 120 perhaps 122. If CPI remained at 119.4 (which the MPC won’t let happen because they will treat the 1% ‘letter’ signal very differently to the 3% one) it would take until June 2014 for the effective annual rate (from Jan 2008) to get back to 2%.

            Working with an annual definition is inconsistent with (i) the Governor talking of medium timescales greater than 12 months – any MPC failure just drops out and (ii) the fact that if the price level has got too far ahead of earnings, even if it has dropped out of the figures then items have still gone up in real terms. The MPC, and it seems MPs, would have us believe that an overnight doubling of price, say, is OK because 12 months later it will have dropped out of the figures. I will continue to worry that real prices up implies quantity demanded down implies excess capacity up implies wages down implies real prices up etc. Inflation may well come under control, but by the time that has happened there is a danger of spiralling into a depressed equilibrium – depressed by real wages having dropped too far. It could take years to get out of this, even if sufficient export businesses already exist … which they don’t.

            Reply: Yes, of course a period of well above target inflation damages the longer term average. It does not prevent inflation coming back to target or below, unless inflationary expectations get baked into pay settlements.

          3. Caterpillar
            August 14, 2011

            Thanks for reply.

            Well we are at the nesting limit so I’d better leave it there with a rewording.

            Nominal GDP is going along tickerty-boo, but most of this is taken up with price level increases, when these increases slow my concern is that we will have locked into a fixed Q (and we#ll need price levels to drop to get out of it). I don’t think the ‘traditional’ wage inflation concern is the lock-in that should be focussed on.

  11. sm
    August 12, 2011

    So stagflation continues:- What is the real rate of change in debt? How much debt will be inflated away in one year and how much debt are we taking on?

    If we have £150bn of extra fiat borrowing a year, we would need +£3tn *5% to cancel?. Is it wrong to think like this? (as literally savers don’t matter- morals aside)

    Can you get Merv-George to explain the ‘real inflation policy’ in real numbers? I think we are just standing still or sinking slowly and waiting for a miracle.

    If we leave the EU funds will be available to reduce debt and rebalance our economy away from imports. Encourage some large energy infrastructure projects to reduce imports, tidal power or thorium based reactors, smarter grids, and energy buffer/storage solutions. Some road building and extra bridges-at pinch points- Dartford. Encourage competition- if incumbents wont build- let the state build it and sell it on to a new competitor.

    We could reduce immigration exponentially and incentivise- mandate training in the UK by large companies, workers in the UK should be prioritised.

    Sort out the banking industry – the bad debt must die.
    Stop facilitating high asset prices, you are preventing the correction needed and allowing an adjustment via inflation of liabilities and essentials. This protection of banking is corroding the notion of democracy.

    Combine CGT/income tax, consider allowing real losses on housing against income tax? An anti-avoidance rule with public disclosure of schemes advised to the HMRC.

  12. StevenL
    August 12, 2011

    Has Mr Osborne read that ‘Project Armageddon – thinking the unthinkable’ report? If not, he should do so!

  13. Caterpillar
    August 12, 2011

    Small article warning not to be blown off course by recent riots and looting.

  14. Tedgo
    August 12, 2011

    I read yesterday that the NHS has made thousands of staff redundant, at an average cost of £40,000 per head, and over the same period recruited many more thousands of staff.

  15. Acorn
    August 12, 2011

    JR, as you have already endorsed it, will you please allow a link to “Sharper Axes, Lower Taxes: Big Steps to a Smaller State”; from the IEA.

    Every Redwoodian should read it. The size of the public sector features heavily on this site, as it should, this report tells you how it got to be where it is now. For me, Table 3 on page 48 of the report is the show stopper. The ratio of public deficit to “private sector GDP” (ie, the non-socialised bit).

    1. uanime5
      August 12, 2011

      For those who don’t want to read a 287 report it recommends privatising healthcare, education, and state owned companies; and ending the welfare system. In other words removing everything the poor and middle class use so the rich don’t have to pay as much in taxes.

      1. David Price
        August 13, 2011

        Nope – so any taxpayer doesn’t have to pay so much tax which surely benefits those on lower incomes relatively more than those on higher.

        As to what the report says I am not surprised a reset is being advocated. The socialists/marxists have become far too greedy with other people’s money so perhaps it’s time for the pendulum to swing the other way.

    2. David Price
      August 13, 2011

      I don’t speak economist and for example never understood why GDP includes government spending but not it’s borrowing. The table on p48 says the non-government spending element of the UK GDP is 49% which is private consumption, investment (for future production) and the difference between imports and exports. So I presume the government spending is 51% which it funds through taxes and debt and so includes paying off the debt.

      So basically our government is spending too much and borrowing to fund it’s addiction.

      This is not good, why isn’t it being stopped immediately?

      It’s not like government spending could be claimed to be investment. For example, the HS2 contract is going to a foreign company so none of that money will increase the UK’s productive or industrial capacity. Besides, BBC executives would still claim humungous taxi fares even if the journey time to Salford decreased by 30 minutes.

  16. Martin
    August 12, 2011

    Isn’t government policy designed to keep house repossessions low so as to keep a flood of red ink off the nationalised banks balance sheets?

    We have nominal interest rates of zero normally implying the economy is awash with cash and credit. Reality is different. Inflation is heading up at levels that Mrs Thatcher’s supporters would call Heath like. Growth is feeble.

    It is only a matter of time before the hedge fund speculators turn their attention to Sterling and the UK banks and it will be very ugly indeed.

    Unfortunately both the last and present governments have failed to grasp the nettle and cut the overall public sector pay bill by say 20%. The money no longer being borrowed by the state should then be fed into the banking system for real growth and not another housing bubble as has happened in the past.

    1. Robert
      August 12, 2011

      Agree – I think we are a large and fairly silent minority, but a UK ‘equivalent’ of the Tea Party movement is necessary to move the ‘conservative’ financial political agenda onto more sensible ground. We need high conviction, ‘ahead of the curve’ passionate conservative politics to return to the fore rather than this vacillating lot at the moment. We are next in line as you say

  17. David John Wilson
    August 12, 2011

    At the same time we get reports that the banks only managed to lend 48% of their target for small and medium companies, What is even more worrying is the num ber of these companies who repoort that they could have expanded their output by huge amounts if appropriate loans are available. We need the government to find a way for such companies which do not have huge assets available to provide security for the loans they need.

  18. Fiona Maddock
    August 12, 2011

    John said, “Either way, it would be wise for the government to go easy on hiring new staff, on adopting new projects or signing up to new commitments. ”

    Most definitely it would be wise to show restraint. Unfortunately we are lumbered with the disastrous commitment to the Olympic Games and its ensuing white elephants.

    It is not too late however, to cancel HS2, which is an unnecessary luxury, and which vandalises our countryside to benefit a very small minority. Mind you, if it only saves fifteen minutes journey time from London to Birmingham, what on earth is the point of it?

    I am suspicious of a government which puts a luxury rail route above other, more urgent priorities.

    Pretty much everything lifelogic says makes sense.

    In Britain we base everything on “short termism” with disastrous results, and over-dependence on imports. This is why we are super-exposed to world economic influences (IMHO) when we could have been more self-sufficient in our own energy supplies, food supplies and other goods and services.

    A major problem of the next decade will be power cuts – you just wait and see. If we don’t get a decent energy policy soon (the last gov. missed its opportunity), there won’t be enough electricity to power everybody’s Blackberries. Maybe that’ll put paid to the greed-driven riots. (This is sarcasm, by the way, not a malicious comment).

    Let’s see luxury projects like HS2 cancelled, or at least postponed, in favour of more urgent projects.

  19. Neil Craig
    August 12, 2011

    Singapore’s economy grew by 14.4% last year admitteldly that was unsuaully good).

    China by 10.8%.

    We could do better than that. Singapore is severely constricted by the fact that it is 5 million people on a tiny island in an unstable and still poor part of the world. Historically poor countries, like China, have not been able to grow as fast as rich ones.

    Technological progress is faster than ever, Moore’s Law is now down to under a year, half what it was when first noted.

    The only thing keeping us in recession is the deliberate Luddism of our political masters.

    I’d take Lee Kuan Yew, old as he is, for PM any day. Or Sir John Cowperthwaite (the Scottish governor of Hong Kong who allowed it to proper by not regulating) and he’s dead but still more competent than Cameron.

  20. Alan Wheatley
    August 12, 2011

    As to controlling inflation, ever since it was decided that it should be controlled by interest rates I have had little confidence in the concept. At first all seemed to be working to plan, but that may have been because of benign circumstance.

    The test of all “good ideas” is to see how well they work in adversity. I hear the Bank are now saying there is little they can do to counter inflationary pressure from abroad. All that can be done is to wait until these pressures work there way through the system. Of course, all inflationary pressures work there way through the system eventually, and a “do nothing” policy is akin to saying that inflation is out of control.

    So, are we now seeing that the “good idea” was not such a good idea after all? It always seemed a highly dubious concept that inflation, influence by many factors, could be controlled by just one. Time for a rethink, I would say.

  21. MajorFrustration
    August 12, 2011

    So we can borrow at some of the lowest rates in the world – thats all we need is more borrowing. Gross Public Sector contribution to GDP – ie borrowing – 1.1 – nett GDP 0.5%
    Government spend should stimulate growth – hello -. Truely triffic. Our politicians seem to grasp the concept of expenses but not Government.

  22. David Price
    August 13, 2011

    So, are you saying that the government should reduce the definite costs it knows about before hoping for increased revenues that might possibly be generated but are not guaranteed?

    If so, I was going to say that surely it was “common sense”, but perhaps not … apologies to Voltaire.

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