As I See It

Crystal balls and economic forecasts

Terry portrait with tieHave you ever found yourself driving in fog, headlights full on, and can’t see a thing? It feels a bit like that after yesterday’s interest rate cut.

This time last year the governor Mark Carney was addressing a gathering at Lincoln Cathedral warming up the markets for a rate rise early in 2016.

When the new year arrived, he immediately scotched any such notion. Economists shutdown their calculators and said a change in interest rates was unlikely until November and more likely, early 2017.

Then came the sharp downturn in China and the markets plummeted, currencies went haywire and everyone started dashing for the hills.

Within weeks the outlook in China didn’t look quite so bad as everyone feared and the markets quickly recovered all their losses. Some traders made fortunes after buying in at the bottom.

Ahead of the EU referendum the (former) Chancellor George Osborne warned that he would need to introduce an emergency budget if there was a Leave vote. There was a Leave vote, and Mr Osborne also left. The emergency budget idea was canned.

However, Mr Carney spoke to the nation saying it was likely there would be some ‘easing’ in monetary policy (ie. a cut in interest rates) because of the uncertainty created by the Brexit vote.

The markets plummeted again, but within a week the FTSE 100 enjoyed its highest weekly rise in four and a half years.

The good news continued and on 20 July, just a month after the EU vote, the Bank of England cheered us by saying there was “no clear evidence of a sharp general slowing in activity since the EU referendum”.

It didn’t take long for the mood to change once again. Yesterday, following the decision to cut the interest rate and increase bond buying, Mr Carney was back in gloom mode, revising downwards the forecasts for growth made only in May. He said: “We took these steps because the economic outlook has changed markedly, with the largest revision to our GDP forecast since the MPC was formed almost two decades ago.”

The message from all this flip-flopping in communications, warnings and policy changes is quite simple: nobody, least of all those in charge of economic policy, has a Scooby about what is really going on, or at least the ability to predict the direction of the economy beyond a few weeks. Mr Carney would get an equally accurate forecast by ditching his economic research and staring into a crystal ball.

We’re now in the lowest interest rate environment in history. Savers have been stuffed and the fall in sterling will raise costs for importers, which in turn will see inflation rise.

The Bank, of course, is charged with keeping a lid on inflation, so talk of a further cut in rates will be tempered against the effect that yesterday’s cut will have, either in raising the cost of living or improving consumer confidence.

What is most required is for an end to all this questionable number-crunching and the introduction a tangible stimulus package that will be seen to make a difference.

The politicians need to back a programme of investment in infrastructure, including the go-ahead for some serious building projects. This would help get the construction industry moving ahead. A cut in VAT would provide a boost to consumers, the retail sector and small businesses.

All this, of course, comes with a health warning as it could suck in yet more imports and contribute further to inflation.

That would signal a need for that interest rate rise that Mr Carney predicted last August. As they say, if you wait long enough your predictions are likely to come true.

Leave a Reply

Your email address will not be published. Required fields are marked as *

This site uses Akismet to reduce spam. Learn how your comment data is processed.