Examination of Witnesses (Questions 80-99)|
28 MARCH 2006
Q80 Mr Newmark: Kate, what is your
own central projection for growth and to what extent does this
reflect more caution about the UK consumer?
Ms Barker: I have already said
that my central projection is a little bit weaker, but I would
not want to overplay the difference between the Bank and the outside
forecasters either given the tremendous range of uncertainty.
I am a little bit more cautious about the consumer and that is
partly because I am a little bit more cautious about the positive
effect of asset prices on the consumer going forward. Charlie
has just mentioned the fact that we have had some output data
for the early part of the year which, on the whole, favours the
case that growth will remain pretty strong and more in line with
the forecast. Of course, the early evidence for the consumer,
as the Governor has already discussed, is that actually it is
a bit on the side of those of us who think consumption could be
weak. To that extent the jury is still out on which of these views
will prove to be correct. The main point I would make is that
they are not very different views of the economy from each other;
they differ only at the margin.
Q81 Mr Newmark: To what extent have
you shifted the emphasis towards domestic consumption as the main
driver of GDP growth, rather than investment, external demand
and net trade? To what extent did the MPC shift the emphasis back
towards exports in the March meeting?
Mr King: I do not think we have
shifted it. The projections for consumer spending in the February
report, which we have not really changed our views on, are that
after a very weak patch at the beginning of 2005 where, if you
will remember, the ONS estimated that consumer spending did not
grow at all in the first quarter, growth has picked up to their
current estimate of 0.7% in the fourth quarter. That is already
at historical trend. We do not have any further pick up in consumer
spending growth in our central projection, but who knows what
it will be. Our view would be that it is much better to average
together Q4 last year and Q1 this year. It may well be that Q1
this year is a bit weaker than Q4, but it is the average of the
two that really tells you what is going on. We do not expect consumer
spending growth to return to the heady rates that we saw from
the late 1990s to the early 2000s. In that period, consumer spending
was rising at a much faster rate than was likely to be sustainable
in the medium term and indeed, that growth did come to an end.
We would expect it to be no more than its historical average over
the next few years. We would expect there to be some modest pick
up in investmentnothing terribly excitingand, although
the economy is growing pretty strongly, a less negative contribution
of net trade to growth than we have seen in the past decade when
net trade subtracted from growth every single year. And, of course,
public spending growth is still pretty robust and implies growth
faster than the growth of the economy as a whole. If you put those
things together, that is a picture of growth around trend as a
whole. That seems to me pretty plausible. In the event lots of
unexpected things will come along which will push us off in one
direction or another. One other point I would make, and it is
true of the MPC as well as other people, is that if you ask what
the risks to growth are, it is very easy to identify downside
risks. When was the last time you talked to someone who said they
had an upside risk to growth? That is not as common. In fact the
MPC's own track record is that we probably, on average, under-estimate
growth and we have downside risks more easily than we have upside
risks. Just as central banks always find it easier to see upside
risks to inflation than downside risks because that is the thing
we are concerned about, so a lot of commentators find it easier
to get headlines or fees for writing articles by pinpointing disastrous
Q82 Mr Newmark: I do not think it
is disastrous outcomes. I think if you listen to what people are
saying, there is a certain nervousness about the market at the
moment. So I think that people being cautious is not necessarily
a bad thing, I think that just reflects today.
Mr King: Our forecast is very
much in line with that. We do not have consumer spending growth
picking up to anything like the growth rates that we saw in the
past. We have a very modest pick up of investment. We take public
spending growth from the Government's own stated plans. That is
going to grow faster than the economy as a whole.
Q83 Mr Newmark: On investment, if
we look at business investment, what is your take on that as a
percentage of GDP and so on?
Mr King: There is no doubt it
has been very weak in the last year or two and weaker than we
had expected and weaker than we find it entirely easy to explain.
Q84 Mr Newmark: It has been very,
Mr King: The growth rates have
been very weak but the level relative to GDP has not been, it
has risen as a share of GDP over the last ten to 15 years and
it is still maintaining that level. Looking at it in that context
gives a slightly different perspective. This was something which
a year or so ago the US and the euro-area were also seeing and
they did not really understand why investment looked weak either.
There were stories from the US and elsewhere that maybe generalised
business caution explained weak investment, but there was no more
compelling or explicit explanation than that. In the last year
business investment has picked up in the US and the Euro-Area
so that puzzle has gone away. The weakness of the growth rate
of investment is still evident in the UK. There is no simple or
easy explanation for that because cash flow and profitability
are high and the cost of capital is at an all time low. So you
would expect that to be an environment in which, with the economy
growing at around trend, to see a somewhat faster pick up of investment.
Q85 Mr Newmark: Exactly right. So
Mr King: I do not think we really
understand why not; we do not claim to. Just as the US and the
Euro-Area could not understand it a year ago but have now seen
investment pick up, I do not think we should rule out the possibility
that this is simply a delay in timing and that investment will
indeed pick up. We have a very modest central projection for the
pick up of the growth rate of investment which does not look implausible
at all. We are not projecting particularly rapid growth rates,
we are projecting quarterly growth rates very much in line with
those that we have seen in the last quarter or so.
Q86 Mr Newmark: Productivity growth
seems to be extraordinarily low. I am just curious as to why you
see that happening. What are the drivers behind that problem?
Mr King: It is certainly true
that measured productivity growth has fallen over the last year
or so to very weak levels.
Q87 Mr Newmark: It is at a 15 year
Mr King: It has picked up in the
last quarter. We think, though no-one can be at all sure, the
most likely explanation is that this reflects the cyclical pattern
of labour hoarding. As the labour hoarding that occurred in the
first part of last year starts to unwindSteve referred
to the rise in unemployment and employment has grown more slowlythen
the measured productivity growth rate starts to pick up. In the
late 1990s when people were talking about the likely increase
in the underlying productivity growth rate we were very cautious
about that. We have seen no sign at all of any pick up in the
growth rate of productivity, but, equally, I think I would be
rather reluctant to draw strong conclusions about whether there
has been a fall in the trend growth of productivity. There is
no obvious reason why there should have been, productivity growth
can move around from quarter to quarter. Only time will tell and
it is not something which it is easy to form a judgment about
and we certainly do not have a closed mind on that.
Q88 Mr Todd: I want to explore the
interaction between household spending and taxation. I think it
is generally accepted that tax levels have drifted gently up over
the last few years. To what extent do you feel that has affected
consumer spending decisions?
Mr King: Clearly it has had some
effect because it slows the growth rate of disposable income.
We saw in the period from early 2003 to mid/late 2005 that the
ratio of taxes to household incomes rose by two percentage points.
We saw in the numbers that came out in the Red Book last week
that the share of income tax and national insurance contributions
to GDP is likely to rise by another percentage point over the
next three years. These are, as you say, gentle rises in the ratio
of taxes to GDP to ensure that (a) public spending on health and
education could rise more rapidly than in the economy as a whole,
and (b) that the public finances would remain in a relatively
prudent state. It inevitably follows that you need to have a higher
level of taxes to GDP and that slows the growth rate of household
disposable income. So it has some effect on consumer spending
but it is not the only effect. In our Inflation Report last time
we pointed to all the other influences, which will be interest
rates, asset prices and expectations of how future incomes will
Q89 Mr Todd: Does it suggest that
to deal with that effect, mild though it may be and complicated
by other factors as well, you also have a duty to consider that
in your thoughts on how to deal with consumer spending projections
into the future on which you have expressed gentle optimism of
growth but certainly not an expectation of a return to previous
Mr King: And that view is embodied
into our central projection.
Q90 Mr Todd: In your opening statement
you referred to a downside risk on consumer spending. Was your
expectation of increased taxation a contributory factor to that?
Mr King: No. I think the impact
of this gentle rise in the ratio of taxes to GDP is it affects
the longer-term growth rate of household disposable income. This
is something that people have seen coming and they know it is
coming, it has been published in the Government's plan. The downside
risks to consumer spending that we identified in the near term
have much more to do with uncertainty about consumer sentiment,
about how asset prices will affect consumer spending and about
the underlying buoyancy of spending given households' expectations
about the future.
Q91 Mr Todd: Weighing up the different
contributory factors, to a large extent you think consumers build
into their thinking the level of tax they are expected to pay
over a period of time and marginal differences make relatively
little contribution to their overall spending patterns, do you?
Mr King: Marginal differences
in taxes make marginal differences in consumer spending growth
rates. Bigger differences may have bigger effects.
Q92 Mr Todd: I am sure you recognise
that sometimes the way that tax changes are presented in the media
imply potential cataclysmic effects on consumer behaviour.
Mr King: I do not think that is
restricted to tax effects but to many other aspects of the economy.
Q93 Mr Todd: Your own decisions are
linked to those as well. We have had some discussion about the
retail sales picture. The data over the last few months has perhaps
not been particularly clear as it shrouds around Christmas where
behaviour is a little bit different from the rest of the year.
What picture do you think you are seeing at the moment?
Mr King: I think that is why I
said earlier that we preferred to look at the fourth quarter and
the first quarter together. The fourth quarter looks relatively
strong and the first quarter looks a little bit weaker. We do
not know the first quarter yet. We have had two months of the
official retail sales data and they are certainly weaker. The
correlation between these retail sales data and the component
of the official estimate of consumption that is spent on retail
goods is actually remarkably poor and that is a puzzle in itself.
I do not think we have much of a guide yet. The reports that we
have picked up from others and our own agents have certainly suggested
that into the new year the feeling about consumer spending is
a bit softer than it was in December last year, but we have to
smooth through these things and to get some feel for the underlying
Mr Bean: The other thing that
is worth adding to that is that retail sales, which we have some
reasonable information on at a monthly frequency, such as the
retail sales data from the ONS, the British Retail Consortium,
the CBI distributed trades, only tells you about less than half
of consumer spending. There is a great swathe of consumer spending
on consumer services which we have much less information on and
there we often rely on what the agents are telling us and there
the picture looks a bit spottier. There are some parts which are
doing okay and some parts which mirror what has happened on the
retail spending side.
Q94 Mr Todd: There is some evidence,
is there not, that that proportion of consumer spending attributed
to services and other spending decisions as opposed to retail
sales which you measure is actually increasing and therefore making
perhaps the retail sales picture rather less of a significant
factor in your decision making than an overall picture of consumer
confidence? Is that reasonable?
Mr Bean: Indeed. It is quite possible
that in the current situation it may typically be younger households
who are concerned about the burden of debt they have taken on
and a lot of their spending may be on the retail side, whereas
older households who have been accumulating financial assets spend
a higher proposition of their budget on services than younger
households. So there may be subtleties about the distribution
of spending across households impacting on the mix of spending.
Q95 Mr Todd: Do you think there are
data gaps in which it would be nice to know rather more about
what is happening? In the services sector and as applied to consumer
decision making, is that an area where simply relying on your
agents, good though they are, is perhaps not sufficient?
Mr Bean: It would be very nice
to have better data on the services sector. It is one priority
that we have signalled to the ONS we would like more progress
on, ie on developing suitable indicators of services activity.
Mr King: This is a major issue
for us and it is not easy for the ONS to know how to develop this,
but they are certainly working on it. The number of establishments
in the UK producing service sector output is very large. Manufacturing
used to have the attraction that it was composed of large establishments
and you could measure and weigh the output. Now it is very difficult
to know how to measure the output from many service sector establishments.
It is very hard to produce decent monthly data on that and so
we do not get monthly figures. Both in terms of estimating what
is happening to consumer spendingbecause so much of spending
is now on servicesand also in terms of getting a feel for
output in the economy, it is the service sector which contains
the information. That is where we really do need to try and make
an effort over the next five years to develop a better statistical
Q96 Kerry McCarthy: I want to raise
the question of business investment. Do you think the fact that
it has been constrained is because, although on a macro level
things are fairly stable, we are given a fair degree of certainty
as to what the future holds, on a micro level there is uncertainty
about long-term prospects and particularly the prospect of competition
from developing countries?
Mr King: There are many potential
explanations for why investment might be weak and we simply do
not know the answer. I think this one about uncertainty at the
macro level being lower but possibly uncertainty at the micro
level being higher is an interesting one.
Ms Barker: The Governor talked
earlier about the fact that we have had very different experiences
of investment in different countries and of course this macro
and micro point has not just been a feature of the UK. It has
also been a feature of the US, and led us to look at the evidence
in the UK. But in the US we have started to see investment picking
up, so I think perhaps it is not likely to be quite such an explanation.
I was rather surprised to discover that the volatility among individual
firms had increased and it is not just through competition from
the developing countries, it is also the fact that technology
changes much more quickly, products change much more quickly and,
of course, the competition regime in the UK, as indeed in other
places, has also been tightened. All these things add together
to make the outlook for individual firms much more competitive
in some ways. From the economist's point of view this is a better
thing, this is the economy working better and more flexibly. Business
people sometimes talk about a lack of `visibility' and that is
perhaps what is driving some of the reluctance to invest. But
it has become more surprising over the past couple of quarters,
in fact since I gave that speech, because we have seen more indications
of investment picking up in other developed countries where you
would expect the same phenomenon to be occurring, so it is a bit
more surprising perhaps that in the UK we are not seeing investment
Professor Nickell: One or two
other thoughts about business investment. One of the features
of business investment which was quite striking a couple of years
ago when we did have a mini boomlet was that that was basically
driven by retail, in building supermarkets and so on. It is important
to remember that quite a big chunk of business investment is in
buildings and structures, factories and so on. If you ask a businessman
why it is harder to get appropriate buildings built and so on,
one of the things they will undoubtedly say is that the planning
system at the moment is such as to discourage that sort of activity.
That is one possibility. Another thought that occurs is that the
booming sector of the economy at the moment is business services,
that is where growth is very strong. One of the constraints on
the expansion of business services is actually the shortage of
business professionals. That ties in with planning incidentally
because one of the reasons the planning system is relatively slow
at the moment is the big shortage of planning professionals and
one of the reasons why is because the planning professionals who
used to work for local authorities now work for private sector
business services companies because, of course, they pay more
and they are in great demand everywhere in order to get things
Q97 Kerry McCarthy: Planning is certainly
something that I have been approached about at a local level quite
recently. I was at a regional CBI dinner on Friday and it was
something that across the board people there said to me. Is that
something that the regional agents are bringing to the Bank's
attention, the fact that problems with getting large scale development,
particularly through the planning process, is holding up this
Mr King: It is not something which
I have heard them report collectively, and we have asked them
about impediments to investment. We look at these things from
time to time. No doubt we will have another survey of investment
before too long and we can certainly go back and ask them how
they would compare the importance of these different factors.
It is not easy because many of the decisions about investment
spendingas opposed to employmentare often taken
centrally and not in the regional offices and headquarters, but
we will certainly try to explore this.
Q98 Kerry McCarthy: What things are
the regional agents telling you at the moment about how companies
Mr King: About their explanations
Q99 Kerry McCarthy: Yes.
Ms Lomax: We asked them about
this not very long ago. They always answer that the main constraint
on investment is uncertainty about demand and I think the answer
this time was not particularly unusual in saying that is the main
consideration. Then there is a long tail of other factors but
none of them really stands out. The thing that I think some of
us were expecting to see but did not show up was pension fund
deficits because that is the anecdote, when you sit around talking
to businessmen when we go on a regional visit, that comes up very
frequently and yet I have not managed to find any hard figures
to support that.