The Governor of the Bank gave an interesting lecture in Liverpool this week.
In it he said: “Growth appears to have been materially better than we had expected in the summer. Households appear to be looking through Brexit-related uncertainties at present. For them signs of an economic slowdown are notable by their absence. Perceptions of job security remain strong. Wages are growing at the same modest pace as at the start of the year. Credit is available and competitive. Confidence is solid.”
This is a generous and significant reappraisal of the position. After all, the Bank had given voice to fears that the UK economy would stall or even go into recession this winter after the vote. It had argued that confidence would be badly damaged, leading to lower consumer spending and slashed company investment budgets.
Instead the UK will be one of the fastest growing G7 economies again this year. The Bank’s statement that “confidence is solid” is an important change of view.
It is true the Governor went on to worry about future slowing of growth as and when more inflation flows through from a lower pound. He pointed out that the current growth rate is very dependent on the consumer.
He also reminded his audience that the pound has rallied by 6 per cent since early November, so the extremes of the fall have been erased. How seriously should we take this inflation threat?
One of the curious things about the fall in the pound is that much of it took place well before the vote. From highs in the summer of 2015, the pound hits lows around April this year before rallying into the referendum.
Against the Euro, the currency of many of our imports, the pound fell 14 per cent from €1.44 in July 2015 to a low of €1.24 by April. Today we are only 5 per cent lower at a little over €1.17. The October retail figures show shop-price inflation still negative for the year to October 2016.
It is possible that the fall in the pound that occurred in 2015 will take longer than a year to flow through. Some, possibly, had more than one year’s currency hedges in place, and some may have had longer-term price contracts.
It is also difficult to escape the conclusion that the absence of any inflation in shop prices so far points to a highly competitive world goods market – and to intense competition on the High Street and from newer web based retailers that has prevented the weaker sterling flowing through.
The impact of lower sterling is more visible and comes through quite quickly in petrol and diesel prices at the pump, and there is a bit more to come from that source following the recent Opec decision to restrict output.
The Governor showed support for relaxing the fiscal targets as announced in the recent Autumn Statement, and highlighted the productivity problem which the Chancellor has made central to his task. Attention now shifts from monetary policy to other measures to propel growth.
Charles Stanley kept its forecast of 2 per cent growth for 2016, when the Bank and others cut theirs. This is based on the March Treasury forecast. This now looks easy to achieve.
We also kept the 2.2 per cent forecast for 2017, based again on the March Treasury figure and the possibility of continuing good jobs growth, some progress with real pay, and the need for additional investment.
If the consumer stays strong, more companies will need to invest to meet the demand. The government has also said it wishes to raise its own investment rate and stimulate more privately financed infrastructure investment.
We will continue to watch the state of consumer confidence, as this is important to the estimate. We will also watch to see how much inflation does flow through from a lower pound. We would expect to see some rise in prices, particularly given some upwards move now in world commodity prices as well.
It looks, however, as if the consumer will be spared some of the rises thanks to plenty of competition. The pound is no longer a one way bet for the bears, which may also help.
John Redwood is Charles Stanley’s chief global economist.