Talk of a post-Covid spending spree shows Bank of England is out of touch | Bank of England
Confidence is everything during a recovery. The question is, can Britons shake off their fears of infection and swagger back to work merely by looking in the mirror and telling themselves everything will be OK.
At the Bank of England, some senior staff believe we are all about to do just that. Having looked into their crystal balls they predict that people who have saved their pennies during the pandemic – and many millions of workers and rich retired have done just that – will spend them when the nation is vaccinated.
That is the view of the Bank of England governor – and the basis for his forecast that a strong recovery will be under way by autumn.
Of course, should a new variant of the virus get the edge over vaccines and wreak havoc, all bets are off. But without a return to severe lockdowns and draconian restrictions, the economy is all set to bounce back quickly, driven by a consumer boom that will dwarf all predecessors with its intensity and size.
“The risk is on the upside – that after you lock people up for this long, they go for it,” Andrew Bailey told the Observer last weekend.
So sunny is Bailey’s view of Britain’s recovery that by early next year (March to be precise) we might hardly know a pandemic had happened at all, in economic terms.
To say the Red Bull must be flowing through the usually austere corridors of Threadneedle Street is an understatement. Only a few days later, Bailey’s colleague, chief economist Andy Haldane, was in even more ebullient mood. He wrote in the Daily Mail last Friday that the UK had “enormous amounts of pent-up financial energy waiting to be released, like a coiled spring”.
While the Bank’s nine-strong monetary policy committee predicted that consumers will spend around 5% of the estimated £250bn of savings that will be lying around in bank accounts by June, Haldane thinks the spending spree could be nearer 20%, or a whopping £50bn.
Deputy governor Ben Broadbent was rather more circumspect when he gave his verdict, saying that lingering fears about new coronavirus variants could deter people from making major spending decisions.
His comments were in line with the much more pessimistic analysis put forward by the National Institute for Economic and Social Research, which also reported last week on its view of the year ahead.
The thinktank said unemployment was likely to rise sharply after the government’s furlough scheme ends in April and will reach 2.5 million – or 7.5% of the workforce – by the end of the year. Even if the chancellor extends the furlough scheme in his budget next month, it will only be because the recovery is delayed.
In a comment that puts her at the opposite end of the forecasting spectrum to Haldane, the NIESR’s deputy director, Hande Küçük, said her yardstick was the global financial crisis of 2008-09, when it took five years for the UK to return to the pre-recession peak.
It is worth looking back 13 years to see how the BoE’s predictions worked out after the UK economy proved to be, then as now, among those worst affected by calamity.
The BoE was not alone when, in 2010, it forecast a swift recovery. The new Office for Budget Responsibility, created by George Osborne to provide independent forecasts for the Treasury, joined in.
Both said that Britain’s private sector businesses were raring to invest in new equipment, IT and skilled people and the boost this would bring to productivity and wages would be so strong it might even trigger inflation.
Of the two organisations, only the OBR apologised for its mistake when – by 2017, and with Brexit a supreme confidence-killer– it was clear such a boom was never going to happen, at least not across the broad swath of British business.
But consumers did their bit and spent all their cash and more, despite austerity.
There followed a rise in employment that might reasonably be called a surge, though much of it was a substitute for company bosses buying new equipment and depended on ultra-low wage increases and among the weakest workers’ rights in Europe.
Inflation and interest rates remained at historic lows. Haldane says it is different this time and a year from now, annual growth could be in double digits and inflation up from 0.6% to 2% or more.
Economic records are being broken all the time, so he may be right to say a historic recovery awaits. Or he could be spending too much time looking at data on his laptop. If he looked more carefully at mainstream life, he’d see that it is filled with people worried about their jobs and health, who think a trip to a pub or restaurant is not worth the risk.