David Blanchflower: Foresight should not be elusive when the future is staring you in the face
If I could see the recession coming, why couldn't Sir Mervyn King?
In his recent Desert Island Discs appearance, the outgoing Bank of England Governor, Sir Mervyn King, astonishingly claimed he should not have been expected to have any foresight regarding the worst recession in living memory, following a comment of mine that this is precisely what he's paid a large salary for.
In the light of his comments that only charlatans say they can predict the future – which appear to have been aimed at me – I should answer those charges. So I present what I said in a speech in April 2008*. Sir Mervyn's only defence would appear to be that he didn't read it, even though the Bank itself published the speech because I was serving on the Monetary Policy Committee (MPC) at the time, and voting – usually without any support – for deep rate interest cuts.
I said then: "I am concerned about the possibility of seeing something 'horrible', which I think is more likely to arise in the real economy – from the housing market, the labour market, from consumer spending or even from further machinations of the credit crunch. The big question is where the UK economy is headed over the next two to three years.
"I spend approximately half of my time in the UK and half in the US and so I am probably quite well placed to make the comparison. For some time now I have been gloomy about prospects in the United States, which now seems clearly to be in recession. I believe there are a number of similarities between the UK and the United States which suggest that in the UK we are also going to see a substantial decline in growth, a pick-up in unemployment, little if any growth in real wages, declining consumption growth driven primarily by significant declines in house prices. The credit crunch is starting to hit and hit hard."
I set out four distinct phases for the US difficulties. Between January 2006 and April 2007 the housing market started to slow from its peak. In the second phase, between May and August 2007, we saw substantial house price falls and declining consumer confidence.
Then, between September and December, earnings growth weakened, as well as real consumption. By January 2008 the housing market problems had spilt over into real activity, with big-ticket spending plummeting and real GDP growth grinding to a halt.
I then presented equivalent supporting data for the UK that suggested the crisis was spreading – but Sir Mervyn continually argued at MPC meetings that what was happening in the US was irrelevant as the UK and US had "decoupled".
But just look at the similarities. As I pointed out, the UK's first phase came between August and October 2007 as house prices started to slow. Then, from November to January 2008, consumer confidence measures started slowing sharply. In early 2008, from February onwards, both the Halifax index and the Royal Institution of Chartered Surveyors survey suggested house prices falls were starting to accelerate. Mortgage lending in March was down 17 per cent on the year. Bradford & Bingley, then Britain's biggest buy-to-let lender, reported that some borrowers were finding it hard to repay their loans, so mortgage arrears were growing – similar to what was happening in the US. Hourly earnings growth was sluggish. Total hours and average hours started to fall in early 2008.
Then we saw growth in the number of people who had to take a part-time job as they could not find a full-time one – up 37,000 in March 2008 alone. Even though the number of jobless fell, the duration of unemployment rose. The number out of work over six months in March 2008 was up 22,000, while the number unemployed for fewer than six months was down 47,000.
I warned back then, rightly, that bad news was on the way, arguing that falling house prices would lead to a sharp drop in consumer spending growth. Develop-ments in the UK were starting to look eerily similar to those in the US six months or so previously. The decoupling of the two economies was always a myth; contagion was in the air. The US sneezed and, lo and behold, the UK rapidly caught a cold.
Let me quote directly from the speech again: "Generally, forecasters have tended to under-predict the depth and duration of cyclical slowdowns. So what do we do? Some commentators have argued that the MPC should have been more aggressive in cutting interest rates in order to head off the downside risks. I agree. My biggest concern right now is that the credit crisis will trigger a rapid downward spiral in activity. Now it is time to get ahead of the curve."
That was pretty close to what happened. The UK went into recession at the start of April 2008. It would be interesting to hear what Sir Mervyn thinks was wrong with my April 2008 analysis. If I could see it, why couldn't he?
*David G Blanchflower, 'Inflation, Expectations and Monetary Policy', 29 April 2008. Speech given at the Royal Society, George Street, Edinburgh
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