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Bank of England: Economic Forecast

Volume 721: debated on Wednesday 6 October 2010


Asked By

To ask Her Majesty’s Government what assessment they have made of the most recent Bank of England economic forecast.

My Lords, I beg leave to ask the Question standing in my name on the Order Paper, and I think I might prefer my noble friend to answer it. [Laughter]

Would anyone else like to answer? The Government consider a range of external views, including those of the Bank of England, when making their assessment of the UK economy and in developing policy. The Bank of England economic forecast in the August inflation report is very clear that the Monetary Policy Committee expects the UK recovery to continue, and its growth forecasts remain higher than those presented at the Budget by the independent Office for Budget Responsibility.

I think I thank the Minister for that Answer, but he forgot to tell us what his views are of the Governor of the Bank of England. As he did not, perhaps noble Lords will not mind if I quote something that he said the other day at the TUC conference. He said, and it is worth quoting:

“There is a perfectly reasonable debate about the precise speed at which to reduce the deficit”.

Does the Minister agree with that?

My Lords, for the avoidance of doubt, the “he” that the noble Lord refers to was the Governor speaking at the TUC conference, not me. There is a considerable question about the path to recovery, but what is noticeable about the Bank of England’s August inflation report is that it clearly states that there is a reduced downside risk to future growth as a result of the fiscal measures taken in the Budget that have reduced the chances of a sharp rise in long-term interest rates. That is one of the findings of the Bank of England that underpin confidence in the steady growth path on which this economy is now set.

My Lords, does the Minister agree that the general view is that the Bank of England’s economic forecasts are too optimistic? In August 2008, when the recession officially started, it said that growth would stay flat, but we achieved a 6.6 per cent decline. Today, it says that growth is going to be over 3 per cent when the OBR and the CBI are closer to 2 per cent. We hear that the Bank of England has new super economic forecasting computers. Does the Minister think that by the economists changing their crystal balls, the leopards are going to change their spots?

My Lords, forecasting is not an exact science, which is why, among other things, the Treasury looks at a wide range of forecasts. Indeed, the Treasury publishes regularly the whole range of forecasts that are out in the market. The Bank of England, to its credit, annually reviews its own record in forecasting. The noble Lord may look, if he has not done so already, at a detailed analysis, which is in the August inflation report, of exactly how well the Bank of England’s previous record of forecasting has gone.

My Lords, has the Minister read Sir Terry Leahy’s comments today? He says that the UK is not heading for a double-dip recession and the economy will be pulled into a stable rebound by the Asian economies. Will the Government redouble their efforts to promote trade with those Asian economies, since they will clearly play a major part in enabling us to grow sustainably in the future?

I am grateful to my noble friend for drawing our attention to the important words of Sir Terry Leahy, the chief executive of our largest retailer. It confirms the remarks of such bodies as the CBI, which now says that the prospect of the UK going back into recession is unlikely, and the ringing endorsement on 27 September of the IMF.

On the second part of my noble friend’s question, it is an absolute priority of the Government to do everything we can to promote trade with the Asian and other economies. I took advantage of the House not sitting in September to visit India and the Gulf to do precisely that. Many of my ministerial colleagues have been doing exactly the same thing.

Does the Minister agree that throwing several hundred thousand public servants on to the unemployment register will reduce income tax revenues? Does he also agree that this, in turn, will mean that the deficit reduction will not be as fast as is being forecast, and that the rate of economic growth is likely to be adjusted downwards, rather than upwards?

I am not sure I agree with much of the noble Lord’s analysis of the situation, other than that a very necessary rebalancing of the economy has to take place. Within 50 days, my right honourable friend the Chancellor came forward with a radical, necessary and tough Budget. There will be painful adjustments as the private sector takes up the slack from the overbloated public sector. That is fully built into the Budget forecasts and the details of the spending cuts will be revealed on 20 October. The great range of forecasters, including the independent Office for Budget Responsibility, expect growth to continue quarter by quarter, with unemployment falling and employment going up.

Does the noble Lord agree that there is an unhappy contrast to be drawn between, on the one hand, the reluctance of the banks to lend money to small and medium-sized businesses and, on the other, their enthusiasm for paying bonuses for profits? Would the situation not be far more acceptable if bonuses were paid for actions that bring stimulus to the economy and not merely profit to the banks?

The critical question is about how we can see credit continue to flow to UK business, particularly small and medium-sized enterprises which cannot access the bond markets. Therefore it is encouraging that in the latest September data for August, credit conditions continue to improve modestly. That is critical. When it comes to bankers’ bonuses, there is unfinished business by both the Financial Services Authority and the Government to see what further action—whether that is disclosure or other measures—is appropriate to make sure that we get a proper balance in this area.

Will my noble friend confirm that the Government are prepared to consider further quantitative easing if absolutely necessary, which does not appear to be the case at present?

It is a question principally for the Bank of England, which has a clear inflation target, as to what further measures should be taken. I note that the recent IMF assessment is that the current monetary stance and data dependent approach to next steps is the appropriate one.

My Lords, will the Minister give a guarantee that when the comprehensive spending review statement is made information will be given to the House on the likely impact not only on employment in the public sector but in the private sector as cuts in public spending have been greeted with concern by the CBI and small businesses because of their impact on that sector of the economy?

My Lords, I think we are straying a bit from Bank of England forecasts but I remind the House that the new independent Office for Budget Responsibility will publish updated forecasts on a regular basis, expected to be twice a year, so that in due course we can expect updated forecasts to reflect all the government policy announcements up to that time.