Bailey pours cold water while overseas dish out a vote of confidence – who’s right about Britain?

andrew bailey
The Bank of England Governor says that the UK’s growth potential is ‘lower than it has been in much of my working life’ - NEIL HALL/EPA-EFE/Shutterstock

A healthy dose of “realism”, so as to galvanise corrective action, or another blunder from the Governor of the Bank of England?

It’s almost never a good idea for the Bank to prognosticate openly on the economy’s long-term growth potential, even though this must obviously form some part of its judgement on what the correct level of interest rates should be.

But to say that growth potential was “lower than it has been in much of my working life”, as Andrew Bailey, the Bank’s Governor, did last week, was foolhardy indeed, if only because it seems directly to contradict the Government’s claim that the economy has “turned a corner”.

The Governor seemed to be talking down the economy at just the moment when ministers want you to believe that sunlit uplands are finally within sight. With an election looming, his remarks have obvious political implications.

It may be that the Governor’s view is rather more plausible than the Government’s, though given how wrong the Bank has been over the past several years about both inflation and growth, you wouldn’t bet on it.

It’s also fair to say that Bailey is hardly alone in his view; the Office for Budget Responsibility (OBR) recently downgraded its estimate of the economy’s medium-term growth potential from 1.8pc to 1.6pc, which would indeed be very low by historical standards.

The OBR’s revision largely reflected demographic shifts in the composition of the workforce towards younger and older age groups, who work shorter hours on average than those of prime age. I assume this is the sort of thing Bailey was talking about. Even so, there seems to be a basic lack of awareness of how his words might land.

People can read the Bank’s forecasts – the latest of which predict that the economy will flatline next year, with a 50pc chance of recession, and then grow by only 0.4pc the year after – and take from them what they want.

The Bank’s predictions may be right, they may be wrong – more likely the latter, given the forecasting and policy errors of recent years. But in the end, they are only forecasts, which, come what may, are almost bound to look very different in a year’s time. Many of the assumptions used will inevitably turn out to be wrong.

Yet for the Governor publicly to contradict the Government is a different matter, even if his remarks were somewhat misrepresented. Small wonder that some Tory MPs were spitting tacks, for Bailey’s pessimism seemed to take direct aim at their prospects of re-election.

Besides, there is good and growing reason to believe the Governor is entirely wrong in his prognosis.

The big takeaway from the events of the last three years is not that of failure and economic decline, but to the contrary, just how resilient many “high-income” economies are to almost anything the world has to throw at them. This is particularly the case for the US, but it also applies to the UK and much of the rest of Europe.

OK, so it’s not as if we’ve sailed through the pandemic and the energy price shock unscathed; the wounds are deep and lasting. Yet at the time it was widely believed that the long-run impact would be much worse.

In the event, this double whammy of shocks has proved far less economically consequential than feared. In terms of GDP and jobs, you’d scarcely believe there was a problem at all.

Recent revisions to the data by the Office for National Statistics suggest that not only has UK growth been quite a bit stronger than previously thought, but unemployment too is significantly lower than prior estimates.

More remarkable still, at least to me, is how little impact the current phase of monetary tightening – one of the swiftest and biggest on record – has had on the economy.

The standard view last year was that central banks, having entirely misread the surge in price levels, would not be able to put inflation back in its box without inducing a recession, which has nearly always been the case in previous inflationary periods.

Yet there now seems to be every possibility of a soft-landing, or what some economists have called “immaculate disinflation” – that is bringing inflation back down to target without a big rise in unemployment. An economic miracle, in other words.

Turn on the TV, and you are immediately overwhelmed by doom and gloom, with Britain routinely depicted as a declining, foodbank nation, benighted by homelessness and the daily struggle to make ends meet.

I don’t want to downplay the hit to many households and businesses from the dual impact of rising interest rates and the cost of living squeeze. Yet the overarching reality is somewhat different. In aggregate terms, the economy is in fact coping with these negatives remarkably well.

House price crash? In real terms, house prices have admittedly adjusted quite a bit, but in terms of nominal prices, it’s barely been noticeable and still nowhere near counteracts the extraordinary gains seen coming out of the pandemic. Compared to previous house price corrections, this is so far but a flea bite.

According to both the Nationwide and Halifax house price indices, moreover, prices are now rising again, as are mortgage approvals. Consumer spending has meanwhile remained relatively robust, and wages are once more outpacing inflation.

Job vacancies are well down on a year ago, but still 156,000 above their pre-pandemic levels. Broadly speaking, there is no problem finding a job if you want one.

brad smith
Microsoft’s chairman Brad Smith said his company’s £2.5bn investment was a ‘real vote of confidence’ in Britain - TOBY MELVILLE/REUTERS

Here in Britain we may have resigned ourselves to an economy that’s no longer worth investing in, but it’s not what many overseas companies, particularly when it comes to the new and expanding industries of the future, seem to believe.

Last week, for instance, Microsoft announced £2.5bn of extra investment in the UK to build a new data centre in north London and expand computer capacity in Cardiff.

It’s amazing what a more compliant Competition and Markets Authority (CMA) can do to change a company’s view. Earlier this year, Microsoft president Brad Smith had said that  it was the company’s “darkest day in our four decades” in the UK after the CMA had threatened to block Microsoft’s $60bn (£47bn) Activision takeover. The EU was a much better place to start a business than Britain, he angrily declared.

Now that the CMA has been persuaded to change its mind, all is again sweetness and light. The £2.5bn investment was a “real vote of confidence” in Britain, Mr Smith insisted.

In any case, Microsoft’s decision follows hard on the heels of a series of other similar sized overseas investments in the UK.

None of this is to deny the myriad economic challenges that all major, high-income economies face. But fortunately, not everybody seems to share Mr Bailey’s downbeat view of the future.

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