Memorandum submitted by Ms Bridget Rosewell,
Volterra Consulting
THE UNDERLYING
STATE OF
THE ECONOMY
Opinion is currently divided on whether we are likely
to see any further interest rate increases or not. One of the
main governing factors here is the ability of the economy to grow.
This is much more important than the state of the housing market,
as indeed the Inflation Report makes clear. It talks far more
about productivity, the labour market, capacity and public sector
resource take than it does about housing.
It is particularly interesting that many commentators
have not taken on board that the Bank thinks about the economy
rather differently from the traditional way of thinking—I
don't know whether they find it frustrating that no one appears
to notice.
The central proposition which might still lead to
higher rates is the following: the public sector continues to
take a higher and higher share of available resource while the
private sector is itself showing signs of recovery in investment
and spending. Fortunately private sector productivity has risen
and so inflationary pressure is not yet apparent. However, it
may yet emerge.
In taking a view on these matters the reliability
of productivity estimates becomes crucial. Much ink has been spilt
on the productivity challenge and how poor productivity is in
this country compared to elsewhere. Improving productivity is
a key plank in central government policy. Yet many of these figures
do not bear much weight. For example, at least a third of the
differential is apparently in the retail sector. At the same time,
international business views UK retail as a global leader, and
there is considerable evidence that these international comparisons
fail to compare like with like. Indeed work done for the DTI has
reinforced this conclusion.
In this context, we may still want to look at how
a given productivity indicator has changed and this may help us
take a view on how the private sector is moving. But with other
innovations and changes going on, estimates of price deflators
may be so misleading that we are getting an entirely spurious
view of productivity and hence of how fast the economy can grow.
The Bank should be asked about its view on the reliability of
productivity estimates and how much weight they should bear in
making decisions about the state of the economy. In essence this
means understanding how strong we think that estimates of real
output are.AND THE
WOBBLY OVERLAY
Judging the underlying state of the economy is one
thing, the MPC also judge its likely variability.
I remain unconvinced that we should expect a serious
fall in house prices unless the economy turns sour. Even in 1989-93,
prices did not fall as much as 30% in real terms. So the real
question is whether the economy is facing a hit of any kind. And
the risks here are definitely on the international front.
They are about exchange rates, oil prices and the
strength and stability of the world economy.
These are also the risks which the Bank has identified
and could be further explored.
18 November 2004
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