Friday, February 1, 2013


ECONOMIC OUTLOOK FOR UNITED KINGDOM---By Shan Saeed Bank of England--Main task The new Governor of the Bank will have unprecedented powers to direct and regulate the UK banking and monetary system. He will need to work closely with the government of the day, so that Bank policy is complementary to fiscal policy and to the government’s legislative priorities. He will need to shape and lead the team at the Bank to use the new powers wisely, in the national interest. He will need to decide what to do with the large QE program he inherits, and what to do about the malfunctioning banks still with large state shareholdings. Let see and hope the new Governor is someone with good judgement about the state of the UK economy and its position in the world. I suggest there are two crucial tests of an individual’s past judgement. Did they realise the Exchange Rate Mechanism would be damaging to the UK? Did they understand how tying the pound to the DM in the early days would lead to faster inflation, and then the opposite once the inflationary effects undermined confidence in sterling? And did they read the 2005-10 cycle correctly? Did they understand that credit and money was too loose in the period up to 2007, and did they understand that this was corrected too abruptly in 2007-8, jeopardising the liquidity and even the solvency of some banks? Did Mr Carney see the problems with ERM membership prior to the entry, and the dangers of DM shadowing. Did he think the previous policy of money targeting , as the German Central Bank did, was a safer way of controlling events? Did he argue for tighter monetary control with higher interest rates in the boom phase prior to 2007, and argue for a more rapid injection of liquidity in 2007-8? This approach should be allied to controlled administration for any bank that could not meet its obligations, is something that has now been adopted as policy for future crises. Clearly when he took over as Canada’s Central Bank Governor he did understand the need for easier money. Lets see what he has studied the unhappy monetary history of the UK and formed the right conclusions from the torrid and bumpy ride the Establishment gives UK, both through its espousal of the ERM and its encouragement of Boom/Bust in the noughties. Today the priority is to assist the government in its wish to promote faster growth. This in turn will help bring the budget deficit down. The Bank needs to relax immediate controls over bank capital and cash, whilst maintaining a more prudent level than in the period prior to 2007 to assist the recovery. There will be time to demand higher levels of cash and capital once the recovery is under way and as banks generate better profits. The Bank also needs to ensure its current policies of QE and Funding for lending are well designed to maximise the beneficial impact of these extraordinary interventions. The US and the UK – different approaches to fiscal stimulus RBS published some interesting figures on the US. Over the last twelve quarters US public spending has fallen in ten of them, making a total decline of 6% over the period. Despite or because of this tightening of the spending stance, the US economy has grown overall by 4.8%. In the UK the last eleven quarters (since the Coalition arrived) have seen a significant rise in real public spending but only a 0.4% increase in output. In most quarters in the UK the public sector has made a positive contribution to output growth. Those who argue the US has grown faster because Mr Obama has avoided austerity whilst the Coalition has gone for it should look again at the figures. Mr Obama has not increased Federal spending by sufficient to offset state spending declines, so the US has been much tougher on public spending overall than has the UK. Why haven’t the US cuts in spending led to economic decline, as some argue here. Some points to ponder upon.

1 comment: