Economic Perspectives –
Further signs of economic recovery, but the Bank strikes a cautious note
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses recent comments from Bank officials as well as the latest economic data.
In this Perspective Ruth Lea, Economic Adviser to the Arbuthnot Banking Group, discusses recent comments from Bank officials as well as the latest economic data:
- In evidence to the Treasury Select Committee, Bank Governor Andrew Bailey noted that the Bank’s latest (August) forecasts were highly uncertain, saying that it was unclear the extent to which “natural caution” would prevent people from going back to their normal lives and “reengaging” with the economy. Concerning the “scarring” of the coronavirus recession, Deputy Governor David Ramsden suggested the economy could be more than 1.5% smaller in the long-run than otherwise would have been the case.
- External MPC member Michael Saunders, separately, suggested that growth was likely to disappoint relative to August’s forecasts and thought additional monetary easing was likely to be “appropriate”.
- There have been further improvements in the housing market. The Bank reported that the mortgage market continued to improve in July, though still weaker than pre-Covid. Nationwide reported a further pick-up in house prices in August, with prices at a new all-time high.
- There was a modest increase (£1.2bn) in net consumer credit borrowing in July, after four months of net repayments.
- The Markit surveys for manufacturing and services suggested a further pick-up in growth in August, but construction, whilst still showing growth, slowed.
- The SMMT reported that new car registrations disappointed in August. They were 5.8% down (YOY).
Concerning the current debate on tax rises and public sector borrowing:
- HMRC’s “ready reckoner” on tax changes show that the “big three” of revenue raising taxes are income tax, National Insurance Contributions, and VAT. But the 2019 Conservative Party Manifesto promised there would be no increases in income tax, NI and VAT rates.
- The mooted increase in the Corporation Tax rate from 19% to 24% could yield £12bn, whilst aligning CGT rates with income tax rates could yield significant revenue gains.
- The OBR’s current projection for public sector net borrowing (PSNB) for FY2020 is over £372bn. However, ONS data for the first four months of FY2020 suggest that the PSNB is running about 15% below the OBR’s forecast. If this persists for the rest of the financial year, borrowing could be around £320bn.
- The eighth round of UK-EU future relationship negotiations will take place on 8-10 September. There are few expectations of any major progress.
Ruth Lea said “The Bank’s August forecast was “relatively” optimistic, projecting a fall in GDP of 9½% in 2020, compared with the OBR’s central scenario decline of nearly 12½%. Recent comments by various Bank personnel have hinted that growth may be revised down in the November forecasts. There may also be more QE. These notes of caution come at a time when the economy still appears to be recovering after the cataclysmic fall in GDP in 2020Q2. However, as Government support schemes are unwound in coming months, not least of all the Coronavirus Job Retention Scheme at end-October, unemployment is expected to spike upwards, weakening the recovery.”
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