"Choppy" was the word the Governor of the Bank of England selected to describe the likely passage of the UK's economic recovery over the next two years, and it would appear to be an apt, if not particularly consoling, choice. It implies that the mysterious mixture of the predictable and unpredictable that has so far characterised the recovery, such as it is, will continue, and that there will be squalls as well, dare we hope, as interludes of serene progress along the way.
The general tone of the Bank's quarterly inflation report, however, was downbeat. Growth will be lower than forecast even as recently as May, and inflation will be higher – and above target – for as long as two years. The reduced growth expectations reflect in part low levels of bank lending, which the Bank appears to be reconciled to, while higher inflation is put down to a combination of the fall in sterling and tax rises, especially the announced rise in VAT.
Introducing the report, Mervyn King said it would take "many years" before bank balance sheets and fiscal positions returned to anything like normal. He also warned that the UK faced a difficult task in rebalancing the economy "away from private and public consumption and towards net exports". Against that, he noted the continuing economic stimulus measures. The fall in sterling appeared in both the negative (inflation) and positive (fostering exports) columns. Overall, though, he offered little succour to anyone in doubt about the fragility of the UK's recovery. It is far from being secure.
Mr King's remarks also contained several subliminal, and quite pointed, messages. One was that he does not want to fall foul, at this early stage, of the new Government or renege on his reported advice to Nick Clegg about deficit-cutting. He went out of his way to reject the idea that there was any causal relationship between George Osborne's emergency Budget and the recent decline in public confidence. It was too early to draw that conclusion, he insisted, though his certainty seemed to fly in the face of at least some of the evidence.
Another was his understandable desire to defend the Bank of England in the face of recent criticism of its forecasting. Mr King spoke of "short-term indicators proving particularly volatile", even as he adjusted growth expectations downwards and inflation estimates quite sharply upwards. A third was his implication, no more than this, that stimulus measures would, and should, be continued.
But the Bank of England's report was not the only survey reflecting the economic weather this week, and potentially making it as well. Figures for house prices published the previous day by the Royal Institution of Chartered Surveyors suggested that demand was suffering from uncertainty on the part of households concerned about tax rises and public spending cuts, supporting other figures showing a general decline in confidence. Against that, however, were the second-quarter unemployment figures published yesterday, which were better in many respects than expected, with the number of jobless falling by almost 50,000, the biggest drop for three years.
There are, of course, other ways of looking at both sets of figures. Stable, or falling, house prices may be bad news for the economy, but they are good news for first-time buyers and may also reflect a more conservative attitude to credit on the part of consumers. At the same time, the fall in joblessness reflects an increase mostly in part-time jobs, and the fall in the number of claimants was much less, implying that the sluggish pace of the recovery may already be slowing. These are mixed signals; they do not augur disaster, but nor do they fuel hopes that the recovery will pick up speed by itself. The patient's health is still extremely delicate, and the treatment – Messrs Cameron, Clegg and Osborne must take note – needs to be tailored accordingly.Reuse content