Memorandum submitted by Bridget Rosewell,
Volterra Consulting
The MPC takes the view that output is close
to capacity: companies are stretching capacity utilisation and
the pool of available labour is shrinking. This view is crucial
to their interest rate views.
A key question is on the willingness of companies
to increase their capacity either by increasing employment or
investment. The Bank points out that there some increase in employment
in business and financial services happened in the third quarter
but this was weak. In the key London market, 2003 (the latest
year available) showed falls in all sectors except public services.
This is a worse private sector performance than in 2002, when
other services (including the key creative sector) continued to
increase.
Private sector employers may not be willing
to compete in this labour market. But if they do, wage costs have
the potential to rise. The counter to this is immigration: George
Wimpey, the house builder, has pointed out that their wage costs
are now flat thanks to the ability to recruit skilled craftsmen
from Eastern Europe.
On investment, profits are still somewhat subdued.
Profit rates are a key driver of investment
and are still lying below the levels of the late 1990s. Although
investment has picked up it is sluggish and this will slow both
the rate of GDP growth and potential productivity growth in the
future.
The prospects for the private sector are both
uncertain and key to the drivers of both output and inflation.
Faster expansion will fuel price and wage increases on the basis
of past history—the role of immigration in key parts of
the economy may well be crucial. But it is just as likely that
weakening consumer demand and a loss of business confidence will
inhibit expansion for most of 2005.
My central view is still that no further interest
rate rises are needed and that a downward move may well be in
prospect after the election. This is especially the case if there
is a tough mini Budget in the summer.
9 March 2005
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