MONUMENT SECURITIES: Sir Edward's Confession
21 Jan 07:50
By Stephen Lewis
Of Monument Securities
LONDON (Dow Jones)--Sir Edward George sought to dispel the gloom that has
descended on the UK economy in his speech yesterday evening to Scottish
bankers. There has been a spate of warnings from private forecasters in recent
weeks regarding the prospects for the housing market and consumer spending.
Retail sales, indeed, appear to have dipped ahead of Christmas while there are
anecdotal reports that house prices may be topping out in some sectors of the
market. Sir Edward nevertheless argued that it was not obvious the household
sector would 'suddenly run for cover', in circumstances where the labour market
was robust and the outlook for inflation and interest rates was relatively
benign. What information we have for January suggests he is right not to panic.
There were indications of stronger retail sales after Christmas. The notes in
circulation data also point to some recovery in retailing activity. Notes are
held primarily in order to be spent. The notes data, therefore, provide a
timely indication of the pressure of demand in the retail sector. The figures
have strengthened to show 6.7% year-on-year growth in the week to 15 January,
as compared with annual growth of only 4.4% in the week to 18 December. The
latest growth rate is still less than the 8%-plus rates chalked up during the
autumn. The official retail sales numbers may not return to the 6% growth rates
they achieved a few months ago but they should manage a 3-4% rate of expansion.
That ought to be enough to ward off recession.
The Bank of England Governor cast a revealing light in his speech on the
principles that have guided his stewardship of monetary policy. He took great
pride in the fact that the UK economy had enjoyed continuous quarter-on-quarter
growth for the past ten years, though he admitted to some anxious moments last
winter when it seemed the record might not bemaintained. The unending upward
arithmetic progression in GDP has clearly been very important to him. He has
sought unbalanced growth in the UK rather than have no growth at all. The
growth has continued even when other industrial economies have adjusted to
external shocks with short-term dips in activity. The last time the UK
authorities sought to buck international influences in this way was in 1974.
The results then were painful enough to deter imitators for twenty years or
more. There is no mistaking the fact, however, that Sir Edward has been seeking
growth at all costs and whatever the global environment.
He made a virtue of this approach. 'In order to keep overall demand in the
economy moving forward in the face of the slowdown overseas, which has
depressed both financial sentiment and business investment in this country, as
well as net external demand, we had no choice but to seek to buoy up the other
elements of domestic demand', he said. The Chancellor's expansion of public
spending was 'positively welcomed' because it meant that the Bank did not have
to pump up consumer spending as much as it otherwise might. As it is, the
growth of consumption, 'inevitably' in the Governor's words, has taken place on
the back of a rapid build-up of household indebtedness, in turn associated with
sharp acceleration in house prices. The implication seems to be that if the
Chancellor had not saved the day by allowing public spending to surge, the Bank
would have felt obliged to encourage yet more household borrowing, with an even
steeper rise in house prices. In short, Sir Edward, in his valedictory
comments, was confessing to being the author of the house price boom and of the
risks of instability the boom brings to the UK economy. All this has been done
to avoid there being as much as one quarter of negative GDP growth. From any
objective monetary viewpoint, this is extraordinary behaviour, which, as Sir
Edward noted, none of his colleagues around the world have cared to emulate.
However, we should perhaps not be too quick to condemn because outsiders cannot
be aware of the political sensitivities that the Bank of England must observe.
The reason why a single quarter of negative GDP growth in the UK has been
inadmissible may be that the MPC's political enemies would have pounced on such
a result when attacking the distinctive style of monetary management the UK has
adopted. Behind that would have lain deep issues relating to national
sovereignty. Sir Edward might fairly claim, in his own defence, that he has
preserved the MPC arrangements to be handed on to a successor who will have
wider latitude for action.
The financial markets' immediate concern was to find clues in Sir Edward's
speech to near-term interest rate policy. His comments on consumer spending
suggested he saw no need for a rate cut to boost domestic demand. He was also
upbeat, perhaps surprisingly so, on global growth prospects. Though the euro
zone was weak, he looked for US growth of 2.5-3.0% this year. Further,
sentiment in financial markets had improved since October. Overall, his words
seemed to point to a no-change decision on rates at the next MPC meeting.
-By Stephen Lewis: 44 20 7338 0179: analysis@monumentsecurities.com
(Stephen Lewis is chief economist at Monument Securities Ltd., London,
independent brokers specializing in institutional business.)
Opinions expressed are those of the author, and not of Dow Jones Newswires.
This column is published for information only, and it neither constitutes,
nor is to be construed as, an offer to buy or sell investments. The information
and opinions expressed herein are based on sources the author believes to be
reliable, but he cannot represent that they are accurate or complete. Any
information herein is given in good faith, but is subject to change without
notice. No liability is accepted whatsoever by Monument Securities Ltd.,
employees and associated companies for any direct or consequential loss arising
from this article. Monument Securities Ltd. is regulated by the SFA and is a
member of the London Stock Exchange, LIFFE and ISMA.
(END) Dow Jones Newswires
01-21-03 0750ET |
