ALEX BRUMMER: Bailey beats the retreat on recession figures

Here is a lesson for politicians and commentators who decided to treat this week’s International Monetary Fund (IMF) forecast of a 0.6 per cent decline in the UK economy in 2023 as calamitous: economic projections are not written on tablets of stone.

In November the Bank of England cast a pre-holiday pallor of gloom over Britain when it forecast the longest recession in the country’s history and a fall in output from peak-to-trough of a whopping 2.9 per cent.

Less than three months later, the Bank says the recession will be shallower, spread over five quarters rather than eight, and the fall in growth will be 1 per cent.

That is a big revision.

The IMF is accurate in pinpointing the causes of the UK’s sub-octane performance. The Chancellor has ladled on the tax hit to the economy so heavily that incentives for business to invest are negligible.

Contrast the way in which the Government is using its balance sheet and what is going on in the US and Germany.

President Biden’s $738billion (£600billion) Inflation Reduction Act is an enormous incentive to green the American economy. 

In Germany, government and industry have come up with a ‘Marshall Plan’ to cope with the post-Russia energy future.

There is a government-subsidised plan to build battery capacity to support making up to 3m electric vehicles a year. 

In the meantime, Berlin and the energy industry have come together to compete a liquefied natural gas terminal in less than a year.

The UK is an outlier in collecting tens of billions in extra business taxes but has no industrial strategy. The implosion of the badly planned, ill-supported Britishvolt factory is a case in point.

As for interest rates, Bank of England Governor Andrew Bailey, Bank insiders plus monetary policy committee member Jonathan Haskel do not think enough has been done to slay the inflation dragon.

Fast expansion of broad money has moderated so that the source of the surging cost of living is becalmed. The Bank fears private sector pay deals are too high and could add to upward price pressures.

The response is the half-percentage point rise in the bank rate to 4 per cent.

How interesting that two outside members of the interest rate-setting committee, Swati Dhingra and Silvana Tenreyro, voted for no change.

The combination of swingeing tax increases and a hike in interest rates to the highest level in 14 years is overkill.

In the same way as the Bank of England was insouciant as prices exploded in 2021, it is overcompensating now with ten successive jumps in the cost of borrowing.

The groupthink has been a feature of major central bank policy over the last several years, taking the shine off performance.

Swings in policy create victims. Home owners facing rising mortgage bills spend less and clog up the housing market.

If second-time buyers postpone purchases, then first-time buyers are frozen out. Similarly, the housebuilders slow down land acquisition and development and it takes yonks to get the market moving.

As for savers, there has been movement in their direction. National Savings & Investments has thrown down the gauntlet with its 4 per cent one-year bond.

The right thing for the high street banks to do would be to respond by raising their savings and deposit returns.

Instead they embrace the endowment effect, the increased profits which arrive when the margin between deposit and lending rates widens. It is banking’s dirty little secret.

Banks are happy to sit there and see savings absorb what Chancellor Jeremy Hunt describes as the ‘stealth tax of inflation’.

This paper is not immune to placing too much faith in forecasts. UK economist Professor Alan Budd, who recently died, was an enthusiast for what can be observed.

Clues to economic health can be gleaned by the number of shopping bags clutched by consumers, crowded tube stations and cranes hovering over city centres. Evidence also can be drawn from shuttered shops in Darlington and use of food banks.

Retail specialist Springboard reports that in spite of rail strikes, the number of workers returning to offices in January 2023 was 17.3 per cent higher than last year.

The number of people shopping in city centres, was up 15 per cent. Those are numbers we can actually believe.