The snappily titled “Forecast Evaluation Report,” published on Tuesday by the U.K.’s Office for Budget Responsibility, has the capacity to rattle more than just the government’s budget plans.
This comprehensive document, explaining the group’s downward revisions to a raft of U.K. economic data predictions, undermines the very notion that Britain has been enjoying an economic recovery, albeit one stalled by the speed bump that is Brexit. It certainly dents much of the rationale for the Bank of England to forge ahead with raising rates at its Nov. 2 meeting, which traders and investors are convinced will happen.
Last month, BOE Chief Economist Andrew Haldane told Sky News that “I hope we might be nearing the end of the tunnel on both pay and productivity.” He also said he’s among the majority of policy makers who believe the economy may be close to needing a reduction in stimulus.
The OBR’s outlook seems set to disappoint his hopes. “This latest set of key economic indicators presents a mixed picture with signs of improvement in U.K. manufacturing offset by the continuing sluggishness of the construction sector and a widening of the underlying trade deficit in recent months.”
The U.K.’s expansion was the weakest among the Group of Seven countries in the first half of this year. On Tuesday, the International Monetary Fund added insult to that injury by failing to upgrade its 1.7 percent 2017 forecast for the U.K., as it lifted projections for almost every other advanced economy.
The OBR added it’s likely to cut its forecast for potential productivity growth in its next round of predictions scheduled for November. It noted that the “productivity puzzle” is not restricted to the U.K., arguing that other advanced economies also seem to be enduring “permanently subdued productivity growth for structural reasons.”
One key element of weakness in the British economy has been business investment.
Raising borrowing costs in the middle of Brexit negotiations, poised to usher in some of the biggest structural changes to the economy seen in the post-War period, requires quite a leap of faith. What looks good in an economics textbook will be tricky to explain to a wage-rise-starved public.
Inflation may be charging ahead at 2.9 percent, well above the bank’s 2 percent target. But wages are still lagging, even if from a higher base after Monday’s revisions from the Office of National Statistics. The direction of travel for wage growth is still dropping. In the real world, that means incomes are falling behind living costs.
The BOE in its recent forecasts has argued the trend rate of growth is lower. According to its economic reasoning, that makes the economy more sensitive to higher inflation — which is why it now wants to reverse the post-Brexit referendum rate cut.
But rising prices are largely the result of imported inflation, which the central bank knows full well it has little to no control over. Sterling’s weakness since the vote means those effects will pass through the inflation measures after a year.
Between now and the next Monetary Policy Committee meeting, the ONS will publish its initial estimate of third-quarter gross domestic product. And on Oct. 18, August wage growth figures could — could — show a slowdown from July’s 2.1 percent figure, which itself lags the average pay increase during the past two years of 2.4 percent.
Weakness in either figure could provide ammunition for those who see a tightening of monetary conditions next month as premature. Governor Mark Carney risks being dubbed an “unreliable boyfriend” once again.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.