Foreward

Last week, the IMF published an update to its Autumn forecast that not only suggested world growth would continue to stay in the doldrums but also that the UK would be at the bottom of the pack and in a recession, over the course of 2023. On the same day, the Office for Budget Responsibility (OBR), published its annual assessment of its own forecast performance. The key take-away for many was that its forecasts had been too optimistic both on growth and on the path of public debt. The common theme to both messages is that the UK is underperforming relative to its historical experience and in comparison with its main trading partners. On that at least we can agree. The day of those reports was also the third anniversary of the UK formally leaving the European Union, on 31 January 2020. And over the period since the referendum of 2016 the productive capacity of the economy seems to have been impaired. We can see this best in the fall in business investment relative to trend, and the slump in the rate of labour participation, with there now being as many vacancies as there are people unemployed. It is also increasingly clear that trade has been impaired, particularly for imports of capital and intermediate goods, and that may have contributed further to the lack of both capital and labour available for firms. With Bank rate now up to 4 per cent from 0.1 per cent, just a little over a year ago, and inflation still awkwardly near to double digits, there is not a lot of joy around. The disaster of the mini-budget last Autumn not only injected further uncertainty into the mix, with the resulting political churn causing much consternation, but also led to a disconnect between bond prices and mortgage availability, which still persists to some extent and has acted to amplify the downward momentum in the economy. As a result, measures of confidence seem to be falling to a low ebb and that great barometer of British life, house prices, has started to fall. So, what next for monetary and fiscal policy? First, our analysis of the current inflationary spiral, while predominantly the result of sharp increases in energy and food prices, cannot entirely absolve the Bank of England from some fault. While the loose monetary policies adopted after the financial crisis may have prevented a deeper and longer depression, the absence of a clear exit strategy when coupled with the response to Covid meant that the kindling had been laid for an increase in costs to fire up rapidly to a generalised inflation. In that sense, the Bank was slow to respond in 2021 to the gradually receding Covid cloud. And I am therefore worried that the Bank, having recognised this error, may feel a responsibility to act too aggressively to the jump in energy and food prices, which ultimately is a temporary inflation. The key here is to fix on a level for the policy rate that will bring inflation back to target over an 18 month or so horizon without inducing a protracted recession. If we can then keep that rate at around 3-4 per cent we would have done well to engineer some form of normalisation at last. On fiscal policy, it is to be welcome that we have an earlier timetable for the Budget, which lies some 5 or so weeks away and that it has been established beyond reproach that the OBR should be allowed to report on any Chancellor's fiscal plans publicly. Expert economic institutions allow us to trust the judgements made on our behalf by politicians or, preferably, hand over the analysis of alternate choices to more capable hands. The Chancellors' speech on 27 January on his vision for the Tech future was compelling but lacked a specific plan for bringing about structural change and any way of measuring progress against these objectives. When we miss our debt or inflation targets, we know. Who will know when we are or are not meeting our targets for enterprise, education, employment and everywhere? And if we are not, what specifically are we going to do? Without a plan against which to monitor progress, that is seen to tie the hands of successive politicians, the focus of getting elected will lead predominantly to an absence of long-term improvements in our economic prospects.