Hamish McRae: Britain up, eurozone down - for once, the Bank is right

Economic View: The markets conclude that this news is so bad the ECB will have to find ways of injecting new demand into the eurozone

Um, a somewhat better outlook for the UK and a somewhat worse one for Europe. That is really the headline summary of the economic news yesterday, and for once I think that the simple story is the right one.

It is a relief to have the Bank of England revising its growth forecast up for a change, instead of down. If this sets the tone for the next year or two it would be a relief, because we have had two years when the pessimists have tended to be proved right and the optimists wrong.

As for Europe, now clearly back in recession with the eurozone experiencing six quarters of decline on the trot, the main concern must be that even the present official forecasts will prove over-optimistic, as they have in the past, and that growth will not resume next year.

As far as the UK is concerned, the Bank's Inflation Report fan charts are a useful place to start. As you can see, the Bank expects a gradual recovery to the long-term growth trend of 2-2.5 per cent a year, and a similar gradual decline in inflation to around 2 per cent. It also seems to expect some upward revisions to past growth numbers, which would be consistent with the elimination of the "double dip".

There is a similar marginal improvement in the inflation outlook compared with previous reports. But in both cases the bands on either side of the central number are quite wide. If the past four years has taught us anything it is that we should be aware that a 90 per cent probability band means that there is 10 per cent chance of the outcome being outside the band.

The inflation projections are based on current market expectations of interest rates and no further quantitative easing, but if things turned out differently there would be changes in policy. The growth figures, well, there have been changes in policy because the deficit-cutting programme has been stretched out, but quite where they go next is unclear. There is a possibility that faster-than-expected growth might get the fiscal position back on track, as seems to be happening in the US, but if there is one overriding message from the report, it is that there is still a long way to go.

There is also a long way to go in cutting unemployment, as the latest labour market statistics show. They are a mixed bunch, with good elements balanced by bad ones. So unemployment on a three-monthly basis is up a bit, but the claimant count is down; and the fall in total employment is balanced by a rise in full-time jobs. But we do rather need stronger figures from now on, and only greater growth can bring that.

If the message for the UK is sort of all right, the message for Europe is sort of all wrong.

That the eurozone is in recession is not a surprise. That France is in recession is not a surprise. That Italy and Spain are declining at an annual rate of 2 per cent, dreadful but not a surprise. The surprise is Germany, which only managed to eke out a little growth in the first quarter thanks to a downward revision of the previous quarter. Indeed there may be further downward revisions of this quarter, propelling Germany into true double-dip territory. So even Germany is in trouble.

Exports? Not good, because demand from China is down and there is more competition from Japan thanks to the weaker yen.

Domestic demand? Flat and getting flatter – very bad car sales in March.

Was there any good news at all? Sure, but it is scraping the bottom of the barrel. Portugal declined at an annual rate of "only" 1.2 per cent, a lot better than before, and the Greek economy actually grew a tiny bit.

The conclusion of the markets is that this news is so bad that the European Central Bank will have to find ways of injecting new demand into the eurozone economy. European equities climbed slightly on the expectation of action. The ECB has leeway to do so, for inflation is well below target, but quite how is harder to envisage.

What worries me is that expectations of the ECB are running ahead of its realistic opportunities. Central banks can print money and cut interest rates, as the ECB has just done, but the link between this and creating sustainable real demand is a loose one.

The hardest thing is to translate this mixed bag into some sort of prediction for the rest of this year. It is difficult to see much of a recovery in the UK if there is no prospect of growth in Europe for a year, maybe longer. On the other hand, the stream of anecdotal evidence here is not bad: businesses a little more optimistic, retailing mostly all right and online retailing storming away, car sales good, activity in the housing market picking up, a modest wealth effect from higher share prices – and so on. Recoveries never feel great in the early stages, and this certainly doesn't, but for once the official view from the Bank feels the right one.

Have equities gone up too far, too fast?

A word about equities, for the performance in recent days has been extraordinary, all the more so because hardly anyone saw it coming – even those of us who were pretty positive have been surprised. The FTSE 100 index nudged above 6,700 in trading yesterday, having been below 6,250 less than a month ago. The previous all-time close of 6,930, reached on 31 December 1999, suddenly seems not that far away, with valuations now much more reasonable than they were then.

So without wanting to spoil the party, let's just put on record that two economists that I admire are sounding notes of caution. Chris Watling of Longview Economics thinks there is a high risk of some sort of pull-back, while Simon Ward at Henderson asks: "Should equity investors take profits?"

Neither have sounded a serious alarm; both think that things may have gone a bit too far, too fast.

My own feeling is that at some stage in this market the FTSE 100 will indeed get past its previous all-time high. But maybe not just yet.

News
The surrealist comedian at the Q Awards in 2010
people
News
Russell Brand arriving for the book launch in East London
peopleRussell Brand cancels his book launch debate due to concerns about the make-up of the panel
Sport
Christiano Ronaldo enjoys his opening goal
champions leagueLiverpool 0 Real Madrid 3: Ronaldo and Benzema run Reds ragged to avenge thrashing from their last visit to Anfield
Arts and Entertainment
Awesome foursome: Sam Smith shows off his awards
music22-year-old confirms he is 2014’s breakout British music success
PROMOTED VIDEO
Life and Style
Six of the 76 Goats' cheese samples contained a significant amount of sheep's cheese
food + drink
Arts and Entertainment
Contestants during this summer's Celebrity Big Brother grand finale
tvBroadcaster attempts to change its image following sale to American media group
Extras
indybest
Arts and Entertainment
Sir Nicholas Serota has been a feature in the Power 100 top ten since its 2002 launch
art
Arts and Entertainment
Sarah Dales attempts to sell British Breeze in the luxury scent task
tvReview: 'Apprentice' candidate on the verge of tears as they were ejected from the boardroom
News
Call me Superman: one of many unusual names chosen by Chinese students
newsChinese state TV offers advice for citizens picking a Western moniker
News
ebooksAn unforgettable anthology of contemporary reportage
News
Wilko Johnson is currently on his farewell tour
people
Voices
New look: Zellweger at Elle's Women in Hollywood awards on Monday
voicesRenée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity, says Amanda Hess
News
Let’s pretend: KidZania in Tokyo
educationKidZania lets children try their hands at being a firefighter, doctor or factory worker for the day
Life and Style
CHARGE BOOSTER: Aeroplane mode doesn't sound very exciting, but it can be a (phone) hacker's friend. Turning on the option while charging your mobile will increase the speed at which your phone battery charges
techNew book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone
Arts and Entertainment
Julianne Moore and Ellen Page are starring together in civil rights drama Freeheld
film
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Day In a Page

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
West Indies tour of India: Hurricane set to sweep Windies into the shadows

Hurricane set to sweep Windies into the shadows

Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?