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
sportWWE latest including Sting vs Triple H, Brock Lesnar vs Roman Reigns and The Undertaker vs Bray Wyatt
Arts and Entertainment
Louis Theroux: By Reason of Insanity takes him behind the bars again
tvBy Reason of Insanity, TV review
Arts and Entertainment
Cassetteboy's latest video is called Emperor's New Clothes rap
videoThe political parody genius duo strike again with new video
Arts and Entertainment
tvPoldark, TV review
ebooksA special investigation by Andy McSmith
  • 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: Retirement Coordinator - Financial Services

Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

Recruitment Genius: Annuities / Pensions Administrator

Negotiable: Recruitment Genius: You will be the first point of contact for all...

Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

£18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

Ashdown Group: Learning and Development Programme Manager

£35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

Day In a Page

Election 2015: How many of the Government's coalition agreement promises have been kept?

Promises, promises

But how many coalition agreement pledges have been kept?
The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

The death of a Gaza fisherman

He built his own reef, and was fatally shot there by an Israeli gunboat
Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

Saudi airstrikes are fuelling the Gulf's fire

Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

The only direction Zayn could go

We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

Spells like teen spirit

A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

If fashion is a cycle, this young man knows just how to ride it

British designer Jonathan Anderson is putting his stamp on venerable house Loewe
Number plates scheme could provide a licence to offend in the land of the free

Licence to offend in the land of the free

Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

From farm to fork in Cornwall

One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

Robert Parker interview

The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
Don't believe the stereotype - or should you?

Don't believe the stereotype - or should you?

We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor
How to make your own Easter egg: Willie Harcourt-Cooze shares his chocolate recipes

How to make your own Easter egg

Willie Harcourt-Cooze talks about his love affair with 'cacao' - and creates an Easter egg especially for The Independent on Sunday
Bill Granger recipes: Our chef declares barbecue season open with his twist on a tradtional Easter Sunday lamb lunch

Bill Granger's twist on Easter Sunday lunch

Next weekend, our chef plans to return to his Aussie roots by firing up the barbecue
Joe Marler: 'It's the way I think the game should be played'

Joe Marler: 'It's the way I think the game should be played'

The England prop relives the highs and lows of last Saturday's remarkable afternoon of Six Nations rugby
Cricket World Cup 2015: Has the success of the tournament spelt the end for Test matches?

Cricket World Cup 2015

Has the success of the tournament spelt the end for Test matches?
The Last Word: Justin Gatlin knows the price of everything, the value of nothing

Michael Calvin's Last Word

Justin Gatlin knows the price of everything, the value of nothing