Senior staff at the Bank of England have of late been a surprisingly reliable source of sunshine amid the gloom of the past year. Governor Andrew Bailey could be found last week telling the Observer that when lockdown ends he expects people to “go for it” and a spending spree to take hold.
The central bank’s chief economist, Andy Haldane, meanwhile, has shed his Eeyore tendencies – lamenting that inequality is rising and productivity falling – in favour of a Tiggerish enthusiasm for the post-lockdown bounce we’re poised to enjoy. Haldane has gone even further than Bailey in speculating about the positive impacts the pandemic may have on productivity: because firms, Haldane claims, have been forced to rapidly integrate digital technologies and overhaul their business practices, they will be tapping in to productivity gains that had otherwise passed them by over the last decade.
This is an interesting point, but in the circumstances, where a reasonably deadly respiratory illness is still circulating widely, and measures need to be kept in place across the economy to deal with it, it is hard to envisage how forced productivity improvements in a few patches of the economy can overcome the huge drag on growth across the rest of it. Retail and hospitality, which together account for more than 13 per cent of GDP, are likely to remain disjointed and curtailed for a significant period of time, with many of their core activities, from pulling pints to selling clothes, subjected to ongoing restrictions.
A shakeout of labour and the wider use of automation in both sectors, which the RSA has suggested is possible, might lead to measurable productivity improvements – if fewer people are employed to pull the same number of pints, that’s a productivity gain – but job losses are hardly something to cheer on. And those parts of the economy where genuine productivity gains might be easier to find – in manufacturing, say, which constitutes just under 10 per cent of GDP – are not big enough to outweigh stagnation or decline everywhere else.
Either way, a more credible view of the future would surely err towards caution. It is notable that early enthusiasts of the so-called “V-shaped” recovery or boomerang recession have reigned in their sanguine forecasting somewhat since last summer. Many of the Treasury’s interventions over the last year, including the deadly “Eat Out to Help Out” scheme, estimated to have increased Covid-19 infections by up to 17 per cent last summer, were predicated on an excitable faith in a sustained rebound in the economy once the virus magically clears up, much as you or I might leap joyfully out of bed following a mild bout of flu. The Treasury’s tone has also shifted since the autumn, with Chancellor Rishi Sunak warning of “permanent adjustment” in the economy, while government sources have begun to discuss a “5 to 10 year” endemic recovery plan.
This more measured approach accords with the best public health forecasts we have. Chief medical officer Chris Whitty noted in a recent Downing Street briefing that a “highly contagious respiratory virus is…not going to be eliminated from the UK”, even with widely available vaccines. Modelling by SAGE suggests social distancing restrictions may need to remain in place until 2022, while a (relatively optimistic) new paper, just published in Science, suggests we might approach endemic Covid in the next decade or so.
But it’s not the Bank of England’s job to chase giddily after whatever passing enthusiasm happens to be gripping economic commentators. Usually, we expect central bankers to be serious, even dour people. Even as accomplished a media performer as the Bank’s former governor, Mark Carney, tended towards the style and manner of a somewhat disappointed parent addressing his feckless progeny.
Assuming, then, that both Andrew Bailey and Andy Haldane know all this, why the promises of imminent milk and honey when wasps and misery are the more likely near-future scenario? Other than the possibility they actually believe their buoyant predictions, the most likely explanation is that this a continuation, in the coronavirus era, of the peculiar circumstances of the last decade.
In early 2009, realising that we faced a financial and economic crisis nearly as big (it later transpired) as this one, the Bank of England took the decision to slash its base rate to near-zero, and commence the huge injections of money into the financial system known as “quantitative easing” (QE). Fearing the possible impact on inflation of the loosest monetary policy in British history, successive governors – first Mervyn King, then Carney – took to talking up the prospects of future recovery. Jam was always about to arrive, in the Bank’s forecasts and its governors’ statements. And with the advent of jam – as a broad-based recovery took off – the Bank would, of course, put up interest rates to curb inflation.
Gesturing to the future recovery was a way to persuade all those dealing in money and financial instruments that interest rate rises were imminent and QE about to be unwound. This assured traders that they could continue to believe, and act as if, inflation would remain at or below the 2 per cent target, so that they would not start pricing inflation in to the assets they were trading – thus helping inflation actually remain on target. The Bank could then carry on keeping its base rate close to zero and expanding QE – spending a whole decade pretending this was only a temporary state of affairs.
Plausibly, what we’re seeing now is a similar attempt to tee up a belief in the Bank’s future intention to increase interest rates. It’s unlikely we will actually see these rate rises, since the economy is in a bad way and will remain so for some time. But if the belief in looming interest rate hikes is sufficiently widespread, expectations of inflation can remain fixed on the 2 per cent target, and the Bank can continue to fulfil its mandate. It’s a sleight of hand, used in the absence of a clear rationale for the Bank’s new powers, and the more it has to use those powers, the more it is coming to rely on the sleight of hand. The real question is: how long can the pretence be maintained?