Economy set for triple whammy, admits Bank chief

Senior economist warns of deteriorating outlook
Growth prospects hit hard by Osborne Budget
Unemployment and inflation likely to soar

The British economy faces a triple whammy of higher inflation, lower growth and rising unemployment, according to one of the Bank of England's most senior policy makers. Living standards over the next few years will rise only "minimally".

In an interview with The Independent, the Bank's chief economist, Spencer Dale, said that he did not expect inflation to return to its 2 per cent official target before the end of next year, about a year later than previously hoped, partly because of the hike in VAT to 20 per cent from January announced in the Budget.

And, although Mr Dale acknowledged that the emergency Budget had done much to avoid the risk of a UK sovereign debt crisis and a rise in interest rates, he also acknowledged that the Budget would mean lower growth. Mr Dale agreed that he would not be surprised if unemployment went higher in the next few months. For the next "three, four, five years, demand in the economy will be "incredibly anaemic" relative to previous recoveries.

Mr Dale said: "The near-term outlook for both growth and inflation has deteriorated over the past couple of months. Inflation has come out a little higher than expected, and the news on VAT in the June Budget means that the time it will take inflation to get back to target will be pushed out, and I expect it will be above target until the end of next year.

"Likewise, there are some signs that growth may be softening, again partly reflecting the June Budget. We've also seen tensions in the financial markets increase, related to concerns about sovereign debt issues in Europe. That has also affected the ability of banks and companies to raise cash.

"There's also the greater question of how things develop as countries around the world accelerate their fiscal consolidation plans."

The economy, said Mr Dale, would not return to normal "for an awfully long time".

The Office for Budget Responsibility has recently put the number of job losses in the public sector at around 600,000 over the next five years. Official data on economic growth in the second quarter of the year will be released by the Office for National Statistics tomorrow. While the pick-up in the economy is widely expected to have gathered pace, the European sovereign debt crisis in May and the June emergency Budget will have damaged business and consumer confidence, implying weaker growth and a possible "double dip" in future.

Meanwhile the European banking system faces a potential crisis tomorrow when the "stress tests" undertaken by European regulators on 91 leading institutions will be published. Banks that fail the tests – designed to determine their ability to withstand a financial shock – will have to be rescued or allowed to fail.

Over the next few years living standards, said Mr Dale, will be "less good than they would otherwise be" and will show only a "modest", "minimal" improvement. Tax hikes, muted pay rises, unemployment and public spending cuts will mean that things "won't feel good" for many families. Rising unemployment will also restrain house prices. The extent of the fall in public sector employment will depend on how public sector wage demands react to the pressure on budgets, said Mr Dale.

The Bank of England would remain wary of rising inflation even if there is evidence that the economy is weakening. Mr Dale condemns what he calls "dangerous talk" and complacency over rising prices: "I read a newspaper article the other day suggesting that a little more inflation might be a good idea because it would dissolve away mortgage debt. And a very senior executive said to me, 'aren't we going back to the bad old days when we just devalued and inflated our way out of trouble?'

"We know the evils of inflation. It adds to uncertainty, it destroys value of hard-earned cash and reduces the efficiency of the economy. We have to be incredibly vigilant."

Mr Dale is sometimes taken to rest on the "hawkish" end of the Bank's Monetary Policy Committee, broadly taking a more pessimistic view about inflation than some of his colleagues, and his latest remarks will add to the pressure, albeit nascent for now, on the Bank to nudge rates up more quickly.

If and when interest rates do start to rise they will add to pressure on homeowners, already suffering the tightest squeeze on household budgets since the Second World War. Mr Dale stressed the "huge" monetary stimulus the Bank was continuing to administer to the economy, with the bank rate at 0.5 per cent, a 300-year low, and the injection of £200bn directly into the economy via the Bank's "quantitative easing" programme. The impact of a lower bank rate, especially on those with tracker mortgages, has meant a substantial bonus in lower mortgage payments every month.

But Mr Dale added: "Since the spring of 2006 inflation has been above target for 41 out of 50 months and for two years it has averaged over 3 per cent. Now, we can come up with all sorts of clever and real reasons to explain our view but at some point people will say 'inflation just seems higher than it used to be' and that is a very substantial risk."

Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
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

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Recruitment Genius: Evening Administrator

£8 per hour: Recruitment Genius: This Pension Specialist was established early...

Guru Careers: Executive Assistant / PA

£30 - 35k + Bonus & Benefits: Guru Careers: We are seeking an Executive Assist...

Ashdown Group: Graduate Application Support Analyst

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Day In a Page

Homeless Veterans campaign: Donations hit record-breaking £1m target after £300,000 gift from Lloyds Bank

Homeless Veterans campaign

Donations hit record-breaking £1m target after huge gift from Lloyds Bank
Flight MH370 a year on: Lost without a trace – but the search goes on

Lost without a trace

But, a year on, the search continues for Flight MH370
Germany's spymasters left red-faced after thieves break into brand new secret service HQ and steal taps

Germany's spy HQ springs a leak

Thieves break into new €1.5bn complex... to steal taps
International Women's Day 2015: Celebrating the whirlwind wit of Simone de Beauvoir

Whirlwind wit of Simone de Beauvoir

Simone de Beauvoir's seminal feminist polemic, 'The Second Sex', has been published in short-form for International Women's Day
Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Mark Zuckerberg’s hiring policy might suit him – but it wouldn’t work for me

Why would I want to employ someone I’d be happy to have as my boss, asks Simon Kelner
Confessions of a planespotter: With three Britons under arrest in the UAE, the perils have never been more apparent

Confessions of a planespotter

With three Britons under arrest in the UAE, the perils have never been more apparent. Sam Masters explains the appeal
Russia's gulag museum 'makes no mention' of Stalin's atrocities

Russia's gulag museum

Ministry of Culture-run site 'makes no mention' of Stalin's atrocities
The big fresh food con: Alarming truth behind the chocolate muffin that won't decay

The big fresh food con

Joanna Blythman reveals the alarming truth behind the chocolate muffin that won't decay
Virginia Ironside was my landlady: What is it like to live with an agony aunt on call 24/7?

Virginia Ironside was my landlady

Tim Willis reveals what it's like to live with an agony aunt on call 24/7
Paris Fashion Week 2015: The wit and wisdom of Manish Arora's exercise in high camp

Paris Fashion Week 2015

The wit and wisdom of Manish Arora's exercise in high camp
8 best workout DVDs

8 best workout DVDs

If your 'New Year new you' regime hasn’t lasted beyond February, why not try working out from home?
Paul Scholes column: I don't believe Jonny Evans was spitting at Papiss Cissé. It was a reflex. But what the Newcastle striker did next was horrible

Paul Scholes column

I don't believe Evans was spitting at Cissé. It was a reflex. But what the Newcastle striker did next was horrible
Miguel Layun interview: From the Azteca to Vicarage Road with a million followers

From the Azteca to Vicarage Road with a million followers

Miguel Layun is a star in Mexico where he was criticised for leaving to join Watford. But he says he sees the bigger picture
Frank Warren column: Amir Khan ready to meet winner of Floyd Mayweather v Manny Pacquiao

Khan ready to meet winner of Mayweather v Pacquiao

The Bolton fighter is unlikely to take on Kell Brook with two superstar opponents on the horizon, says Frank Warren
War with Isis: Iraq's government fights to win back Tikrit from militants - but then what?

Baghdad fights to win back Tikrit from Isis – but then what?

Patrick Cockburn reports from Kirkuk on a conflict which sectarianism has made intractable