Memorandum submitted by Bridget Rosewell
The Bank of England says there is only a 10
per cent chance of a recessionthe central projection shows
growth falling only a little below 2 per cent in the middle of
next yearand on current interest rates.
Is this unduly optimistic?
1. THE STARTING
The optimism about 2002 appears to be partly
based on the strength of the current situation. Though investment,
exports and manufacturing are suffering, the consumer is standing
firm, with spending growth above the rates expected in August.
In addition there have been revisions to statistics which have
made 2000 a less good year and the first half of 2001 rather better.
All of this means that the starting point from which the economy
is now declining has been revised up.
The first estimates for growth in the third
quarter was only a little lower than the second quarter. Consumer
confidence fell in October, but not dramatically. Retail sales
have held up. Retailers are reasonably confident that sales will
do well up until Christmas although the mood is undoubtedly fragile.
However, business confidence has collapsed,
particularly in manufacturing and exports are doing particularly
Poor exports, combined with strong consumer
growth means problems with the balance of payments. Although imports
have also dropped back in recent months, with lower imports of
components in particular, this is an under-reported problem. Indeed,
the balance of payments is hardly mentioned in the Inflation Report.
2. THE OUTLOOK
It is not clear that it is reasonable to believe
that simply because the starting point has improved that there
are as few problems as the Inflation Report suggests. It is true
that there is scope for further cuts in interest rates if the
slowdown turns out to be worse than expected here, and the Report
refers to this possibility.
In my view, this gentle downturn envisaged by
the MPC is incompatible with the loss of confidence and general
uncertainty being seen across the world. The outlook here is consistent
with the picture that might have been expected before the events
of 11 September. No amount of interest rate cuts will compensate
for a major loss of confidence. In addition, low inflation takes
no hostages if a mistake is made in taking on debt. Inflation
will not rescue those who take on too much. This will become increasingly
obvious during 2002 and will depress recovery.
Business difficulties are likely to continue
in 2002, particularly as the consumer is likely to draw in her
horns in 2002. Though this may not mean a fall, this will no longer
compensate for weakness elsewhere. Moreover, the balance of payments
problems will become more visible and some will be calling for
higher interest rates to correct this, even though inflation will
not be in evidence.
Market weakness is therefore likely to continue
to bedevil the equity markets, which will give both bonds and
property a higher profile. There may continue to be a reassessment
of the proper percentage of portfolios that should be held in
On the other hand the high worth residential
market will be affected by low bonus levels, though low interest
rates will entice some into larger mortgages.
I believe that the chance of an actual recession
is rather higher than the Bank does20 per cent. However,
the most likely outcome is for a slow down in the economy continuing
into the summer and just dipping below the zero line. This is
still worse than the position forecast in the Bank's report.
20 November 2001