Fears that advanced economies, including Britain, might have entered a phase of “secular stagnation” were rejected last night by the Bank of England Governor, Mark Carney.
Speaking in New York, Mr Carney took issue with the bleak hypothesis, recently put by the former US Treasury Secretary Larry Summers, that rich countries might have reached a technological innovation barrier which would severely limit their capacity to grow.
“Such worries have proven misplaced in the past and scepticism is warranted now,” he said. In a reference to Twitter, seen by some as one of the iconic innovations of the internet era, Mr Carney added: “It seems unlikely that communicating in 140 characters – useful discipline though that is – represents the apex of human progress”.
Homing in on Britain, Mr Carney argued that flexible labour markets and openness to global trade and investment flows meant long-term UK growth prospects were “promising”. He said: “It is hard to think of any reason why there should have been a persistent deterioration in the rate of potential growth in Britain.”
The UK economy had sufficient spare capacity to grow without generating excessive inflation. And despite rising concerns in some quarters over the unbalanced nature of this year’s recovery – which has been driven by rising household spending rather than the hoped-for increase in business investment and exports – Mr Carney also sounded a sanguine note.
“These developments merit vigilance but not panic” he said. “Recoveries are seldom led by investment, and strong demand from the UK’s major trading partners, including the eurozone, appears some way off. Ultimately a sustained recovery in the UK will require a more robust and balanced global economy.”
The Bank’s Financial Policy Committee regulator had the tools necessary to ensure financial stability despite low interest rates. Earlier this month the FPC removed a subsidy from the housing markets and signalled its intention to do more to curb banks’ mortgage lending further down the line. Mr Carney, speaking to the Economic Club of New York, defended the Bank’s Forward Guidance policy, saying it helped to give households and businesses “the confidence to spend and invest”.
He also offered an explanation for the sharp turnaround in the economy this year, which had caught virtually all forecasters by surprise. Monetary policy had finally gained “traction”, he said, describing how “improved access to finance and raised expectations of future prospects led to a reduction in precautionary savings by households, a modest recovery in consumer spending, a revival in housing investment from very low levels, and an increase in business confidence to a 15-year high”.
In a much talked-about speech last month Mr Summers suggested that the new normal state for advanced economies was one of low growth and posited that full employment could only be sustained in this new environment by asset prices bubbles fuelled by cheap credit.