The good news has stopped coming already. (Sorry, Dave, it didn’t last a month.) Low growth, high unemployment and above-target inflation are here to stay and there are no green shoots – you are going to regret that you called it way too soon. Previously, I have criticised the Office for Budget Responsibility (OBR) and the Monetary Policy Committee (MPC) at the Bank of England for their overly optimistic growth forecasts but at long last the MPC, in its latest inflation report, has become more realistic.
It has significantly downgraded its GDP growth forecast, especially for 2013, in part as a result of the squeeze on real incomes from rising inflation and because forward-looking business surveys have been markedly downbeat. On the day the MPC report was published, the Office for National Statistics announced the biggest rise in the Jobseeker’s Allowance claimant count (up more than 10,000) for a year, adding to the gloom.
To the right, you can see two ziggurat charts for the final quarters of 2013 and of 2014, which are taken from the MPC report. These show
the probabilities of a range of GDP growth predictions, compared with the committee’s last forecast in August.
The big deal here is that the MPC has used its judgement rather than a forecasting model to remove the prospect that the economy could get some really good outcomes. Both ziggurats shift to the left compared to August’s forecast, showing lower overall growth; in each case, the 90 per cent confidence interval no longer contains 4 per cent or 5 per cent growth. Whenever I discussed the August forecast with business folks and told them that the MPC thought there was some prospect of 5 per cent growth in 2013 and 2014 but little chance of negative growth, the response was an outbreak of laughter. Nobody believed it.
It remains hard to see where even this small amount of growth, especially in 2014, will come from, given the low levels of business and consumer confidence and a slowing world economy, plus the euro area in double-dip recession and a possible “fiscal cliff” in the US. So, these forecasts may still be overcooked.
That said, the MPC is forecasting there could be a triple-dip recession, with output turning negative in the fourth quarter of 2012. So much for the economy “healing”, as George Osborne has claimed. It was growing when Slasher took it over but he killed that stone dead.
The MPC also predicts that output won’t return to its pre-recession level in 2008 until mid-2014. This is the weakest recovery from recession ever and is already longer-lasting, in terms of lost output, than the Great Depression (which went on for four years). In contrast, US output returned to its starting level after 45 months and has grown 13 quarters in a row – against the UK’s paltry one. The MPC does not expect GDP to be revised up in any serious way, as the small group of deluded “recession deniers” still claims.
Another developing story is the impact of Osborne’s austerity as measured by what are called the fiscal multipliers, which calculate the hit the economy takes from fiscal changes. In a big blow to Osborne, research by the OBR suggests that these multipliers are much larger than it previously thought. In its forecast evaluation report of October 2012, the OBR concedes: “The multipliers would have needed to be more than twice as large to explain the growth shortfall we have seen. Estimates of multipliers vary widely, so it is clearly possible that the fiscal consolidation exerted more of a drag on growth than we assumed.” It sure has.
What applies on the downside to cuts applies in spades to stimulus, as multipliers tend to be higher. Multipliers for infrastructure build are likely well over two, so you can and should borrow your way out of a debt crisis when interest rates are so low and the economy is flat on its back. There is a lot of spare capacity in the economy, so now is the right time to inject a substantial fiscal stimulus, focused on expanding the infrastructure, along with large tax cuts directed at firms to get them hiring and investing again. Are the Tories really opposed to tax cuts?
The big question – in the light of the MPC’s downgrading of its growth forecast and given the OBR is sure to downgrade its forecast, too – is what will be announced in the autumn statement on 5 December. My answer is: probably not much. We are likely to be told that the part-time Chancellor is giving up on his self-imposed fiscal rules, even though he made a £37bn smash-and-grab raid on the Bank of England to make his borrowing look lower.
The sense I get is that the business community has bailed out on Osborne. The refrain is that he must do something – anything – but
it has zero confidence that he will. If the MPC is right (and I suspect it broadly is), there is little chance of a significant economic turnaround before the 2015 election.
Finally, there is that little matter of who is to be the next governor of the Bank of England. Apparently the decision will also be announced on 5 December. It won’t be me, even though ForexLive kindly named yours truly the number one central banker in the world since the
financial crisis began. Paul Tucker didn’t appear on the list. Nor Mervyn King. My Christmas came early this year.
David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire