David Blanchflower: The MPC didn't have a clue and still doesn't

They expected the depth of the recession to be revised upwards

Economic Outlook: What a contrast between the upbeat and exciting news on the Olympics and the downbeat news on the economy. Great Britain ranks third in the medal table. But that good news is tempered by the fact that, in terms of economic performance, the UK is doing disastrously in the economic medal rankings. If we just add up GDP growth in the last eight quarters for which we have data, the UK ranks 31st out of 34 OECD countries, below Ireland (29th) and Spain (30th). The only countries with a worse performance are Italy (32nd), Portugal (33rd) and Greece (34th).

The bad news on the economy keeps rolling in. Retail sales numbers were weak. The trade figures for June were pretty bad, with the trade deficit the largest since comparable records began in 1997. The UK's deficit on trade in goods and services increased to £4.3bn in June, up £1.6bn from £2.7bn in May, driven mostly by a big decline in exports to non-EU countries. The worsening trade picture is not primarily due to a slowing eurozone as ministers have tried to claim.

Data releases from Germany last week showed declines in manufacturing orders, industrial output, imports and exports. Chinese exports in July rose just 1 per cent from a year earlier, undershooting forecasts by a big margin. All this means that net trade is likely to continue to make a negative contribution to UK growth as the world economy slows. The Chancellor's Office for Budget Responsibility has forecast that it will make a small positive contribution.

Industrial production numbers were also bad, although they were slightly better than the consensus forecast and will result in a small upward revision of around 0.1 per cent to the minus 0.7 per cent first estimate of GDP growth for Q22012. Construction output fell by 3.9 per cent in the second quarter, revised up slightly from the first estimate of 5.2 per cent, but there were also downward revisions for Q32011, Q42011 and for Q12012, whereas Q22011 was revised up. So the latest figures do not compensate for the previous three quarters' falls, which is why overall for the year construction activity has shrunk by nearly 10 per cent.

Of interest also is the fact that nearly every sector of construction activity, from private to public and from housing to infrastructure, has shrunk considerably over the last year, and that overall, construction activity across GB has contracted by 9.5 per cent in a year. Commenting on these figures, Simon Storer of the Construction Products Association said: "What is most concerning is that private sector activity has fallen sharply, implying that not just activity but also confidence is sadly lacking. This situation is rapidly becoming a crisis, and at this rate I wouldn't be surprised if manufacturers begin to shut down their operations and lay people off."

Unsurprisingly there was all sorts of gloom and doom and handwringing from the beleaguered Governor of the Bank of England at the Inflation Report press conference last week, where the MPC downgraded its growth forecast once again, to 0 per cent for 2012 and around 1.7 per cent in 2013. In what amounts to a complete abdication of responsibility, the Governor essentially claimed: "We got it wrong. Things are bad. And they're not getting much better anytime soon. But monetary policy is fine. And fiscal policy was right, is right and should not change." That is a total admission of macro policy failure so we should do nothing! It's absurd. People running macro policy need be accountable; the buck stops at the top.

The above chart, which is taken from the August Inflation report, illustrates how hopeless the MPC have been not only in their forecasts but also in their predictions of subsequent data revisions. It shows the May 2011 growth fan chart, which contains both a forecast and a backcast over the preceding seven years because data can be revised. The green fan to the left of 2011 shows the MPC's expectation for data revisions in comparison to the ONS official data, plotted as the black line. It is clear that they expected the depth of the recession to be revised upwards, which hasn't happened. In general revisions have been up when the economy was on the up phase of the cycle in 2007 and down when it was declining in 2006. And then the MPC forecast that by Q2 2012 growth would be around 2.3 per cent with some prospect of 5 per cent and smaller prospects of zero or negative growth. Zero or negative growth was outside the 90 per cent confidence interval. But that is exactly what we now have, as the red line shows!

The MPC's new growth forecast looks broadly similar in shape to the one from May 2011 and looks equally unlikely to be correct, with a central projection of growth of 2 per cent by 2013 and beyond with only a slim prospect of zero or negative growth. The MPC didn't know where the economy had been, didn't know where it was when they made the forecast, and had no clue where it was going and still doesn't.

It is blindingly apparent that the MPC should have done much more monetary stimulus a while ago, including unconventional asset purchases, as suggested by my old friend Adam Posen. On that subject, I was particularly impressed by the recent speech by Adair Turner, who unlike Sir Mervyn King seems prepared to think out of the box in terms of activist fiscal-monetary co-ordination, purchasing a wider range of assets and debt restructuring. Adair has suddenly jumped to the top of my list of candidates for the Governor's job. The King is dead, long live the king.

Start your day with The Independent, sign up for daily news emails
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Recruitment Genius: Online Customer Service Administrator

£16000 - £18000 per annum: Recruitment Genius: An Online customer Service Admi...

Recruitment Genius: Digital Marketing Executive

£18000 - £22000 per annum: Recruitment Genius: This global, industry leading, ...

Day In a Page

'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Russell Brand's interview with Ed Miliband has got everyone talking about The Trews

Everyone is talking about The Trews

Russell Brand's 'true news' videos attract millions of viewers. But today's 'Milibrand' interview introduced his resolutely amateurish style to a whole new crowd
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before
'Queer saint' Peter Watson left his mark on British culture by bankrolling artworld giants

'Queer saint' who bankrolled artworld giants

British culture owes a huge debt to Peter Watson, says Michael Prodger
Pushkin Prizes: Unusual exchange programme aims to bring countries together through culture

Pushkin Prizes brings countries together

Ten Scottish schoolchildren and their Russian peers attended a creative writing workshop in the Highlands this week
14 best kids' hoodies

14 best kids' hoodies

Don't get caught out by that wind on the beach. Zip them up in a lightweight top to see them through summer to autumn
Robert Fisk in Abu Dhabi: The acceptable face of the Emirates

The acceptable face of the Emirates

Has Abu Dhabi found a way to blend petrodollars with principles, asks Robert Fisk