Hearing clearly amidst the noise

THE VOLUME of the "how quickly should they come down" UK interest rate debate notched up a couple of clicks this week, with Eddie George supposedly displaying a hawkish tinge to his plumage. His comments about the North and the South needing different interest rate policies - no, he didn't quite say that, but it was implicit in his briefing - also raised the temperature more than somewhat.

At a time like this, the thing to do is to try to distinguish the clear signals from the background noise. Let's try to do so.

The first source of noise to filter out is the political one - not the sounds made by the main parties, but rather the attempt by interest groups to push their preferred policies.

Because borrowers are a more effective lobby than savers there will always be a political bias towards low interest rates. Borrowers tend to be large companies and younger people. Both know how to make a noise. Savers not only tend to be older people; they are often less well off than the borrowers. Their voice is inevitably more muted.

The second source of noise to filter out comes from dodgy data. Economic data frequently turns out to be wrong. Not only are the initial figures often so radically revised that they turn out to have been worse than useless; whole new series of data are published which give a different picture of what has happened.

There have been three important examples of this misinformation this year. One is shown in the chart, which demonstrates that earnings were much lower in the early part of this year than the earlier series suggested, and that after a peak in late spring, they have been tending to go down. Since earnings trends are one of the key variables taken into account by the Bank of England Monetary Policy Committee (MPC), you can see the obvious scope for a misjudgement.

The two other bits of data are the output of the economy as a whole and the balance of payments. If earnings growth this year has been "better" than expected (the inverted commas because if you can sustain higher wages, that is surely better than underpaying your workforce) so too have both economic growth and the current account.

People keep talking and writing as though there was already a recession. However, not only does the economy still seem to be growing, but growth in recent years has been markedly higher than the original figures suggested. It seems to be growing still. As for the current account, instead of going into a yawning deficit it has more or less remained in balance. The latest figures, for the second quarter, showed it in surplus.

The possibility that fears of recession have been much exaggerated has been aired by Professor Tim Congdon, of Lombard Street Research. He points out that there were recession-mongers as far back as the middle of 1997 warning of the possibility of a fall in output this year. So far they have been wrong. He believes they may be equally wrong next year, because there is no need for a recession.

It is an interesting way of looking at recessions: things that are both necessary and deliberately created. The last three recessions were all associated with high inflation, which policy-makers had to combat by cutting demand. At present there is no inflationary problem, or at least not one of any magnitude. So there is no need for a period of falling output.

He believes that "policy-makers would be incompetent if they allowed a recession to develop". But that, he argues, is not necessarily a call for big cuts in interest rates. Sterling has weakened against the mark, but the fall was disproportionate to the cut in interest rates. If rates were cut to 5 to 6 per cent the pound might fall too far and inflation rise above the target level.

I would add that since sterling seems to be almost a dollar proxy, we may find that if the dollar does come further down the pound will become even more competitive against the European currencies. What we cannot know, however, is how sterling will behave once the euro is launched. Will it continue to track the dollar, or will it start to converge on the euro? Or will it remain a "safe haven"? All we can say is that the background noise will be very loud for the next several months.

So where are the clear signals?

I'm not sure about the clarity of the data, but there seems to me to be several areas where we need to listen.

The most obvious is employment. If job creation is continuing - and according to the Labour Force Survey it grew by 70,000 in the three months to end July - then we should set that growth against the high-profile job losses by large employers. The problem is that the data takes a while to filter through, but at least employment (unlike unemployment) is a forward-looking indicator. Companies do not take people on if they see that demand is falling.

The next area is corporate profits. Company profits are real figures, not estimates or polls. If profits hold up, two things happen. Companiescarry on investing and growing; and the share markets are better able to recover their nerve. The analysts are busy cutting their estimates for next year, but it is still possible to expect some profits growth, even if it is very little.

A third area is tax receipts. Again, these are hard figures, lagged a bit to be sure, but actual money collected. If the economy is still growing, tax revenues will grow. If it stops, tax revenues will slide.

And how might the Bank of England react to developments in these areas? The key thing to understand is that the MPC is not only divided into hawks and doves, but hares and tortoises. The hares want to move fast - push rates up, whip 'em down - while the tortoises want to move slowly. If the economy were to head down, watch for the hares, for their moment might come.

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
and  

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