ALEX BRUMMER: Bailey beats the retreat on recession figures

Here’s a lesson for politicians and commentators who decided to call this week’s International Monetary Fund (IMF) forecast of a 0.6 percent fall in the UK economy by 2023 catastrophic: economic projections are not on stone tablets written.

In November, the Bank of England cast a pre-holiday gloom over Britain when it predicted the longest recession in the country’s history and a peak-to-trough output fall of as much as 2.9 per cent.

Less than three months later, the Bank says, the recession will be more shallow, spread over five quarters instead of eight, and growth will slow by 1 percent.

That’s a major revision.

The IMF is precise in pinpointing the causes of the UK’s below-octane performance. The chancellor has scooped up the tax burden on the economy so heavily that incentives for companies to invest are negligible.

Compare how the government uses its balance sheet and what’s going on in the US and Germany.

President Biden’s $738bn (£600bn) Inflation Reduction Act is a huge push to green the US economy.

In Germany, the government and industry have devised a ‘Marshall Plan’ to deal with the post-Russian energy future.

There is a government-subsidized plan to build battery capacity to support the production of up to 3 million electric vehicles per year.

Meanwhile, Berlin and the energy industry have teamed up to build a liquefied natural gas terminal in less than a year.

The UK is an outlier in collecting tens of billions in additional corporate taxes, but has no industrial strategy. The implosion of the poorly planned, poorly supported Britishvolt plant is a good example of this.

On interest rates, Bank of England Governor Andrew Bailey, bank insiders, and Monetary Policy Committee member Jonathan Haskel think not enough has been done to beat the inflationary dragon.

The rapid expansion of broad money has been tempered, calming the source of the rising cost of living. The bank fears that remuneration agreements with the private sector are too high and could contribute to upward price pressure.

The answer is to increase the bank interest rate by half a percentage point to 4 percent.

How interesting that two outside interest rate committee members, Swati Dhingra and Silvana Tenreyro, voted for no change.

The combination of sweeping tax hikes and interest rates rising to their highest level in 14 years is exaggerated.

Just as the Bank of England was indifferent when prices exploded in 2021, it is now overcompensating with ten consecutive jumps in the cost of borrowing.

Groupthink has been a hallmark of key central bank policies in recent years, taking the shine off performance.

Fluctuations in policy make victims. Homeowners faced with rising mortgage bills are spending less and clogging the housing market.

If second buyers postpone purchases, new buyers will be blocked. Likewise, the homebuilders are slowing down land acquisition and development and efforts are needed to get the market moving.

As for savers, there is movement in their direction. National Savings & Investments has thrown in the gauntlet with its 4 percent one-year bond.

The right thing for the big banks would be to respond by increasing their savings and deposit yields.

Instead, they embrace the endowment effect, the higher profits that come when the spread between deposit and borrowing rates widens. It’s the dirty little secret of banking.

Banks are happy to sit there and watch savings absorb what Chancellor Jeremy Hunt describes as the “hidden burden of inflation.”

This article is not immune to over-reliance on forecasts. The recently deceased British economist Professor Alan Budd was a lover of what can be observed.

Clues to economic health can be gleaned from the number of shopping bags held by consumers, overcrowded subway stations and cranes hovering over city centers. Evidence can also be provided of shuttered shops in Darlington and the use of food banks.

Retail specialist Springboard reports that despite railroad strikes, the number of workers returning to offices in January 2023 was 17.3 percent higher than last year.

The number of people shopping in city centers increased by 15 percent. Those are numbers we can really believe.