Examination of Witnesses (Questions 140-159)|
12 DECEMBER 2006
Q140 Mr Breed: So although there
is some modest evidence that people are under a bit more pressure
with people missing their mortgage payments, a little bit more
sort of pressure with a few more insolvencies, some modest rise
in repossessions and such, how concerned are you that we are at
the beginning of what might be something a bit more serious?
Mr Cunliffe: I do not see in the
indicators of mortgage repossessions and in the survey results
on household finances anything like the same sort of distress
signals that you saw in the early 1990s. The Bank of England's
Quarterly Bulletin and Inflation Report has some information on
this. It suggests that a number of households are having problems,
although, from the Bank's survey, the problems look to be in the
unsecured and the consumer credit area rather than in the secured
housing area, so I do not see evidence of problems there. When
you look at income gearing, the ratio of the mortgage repayments
to income, that seems for the UK historically to be at relatively
safe levels. I cannot predict the housing market, so I cannot
tell you what is going to happen, but certainly in those indicators
you do not see the sorts of distress we have seen at other times
when the market has fallen quite sharply.
Q141 Mr Breed: Although the indications
from the banks', not the Bank of England, the ordinary banks'
figures lately are a bit mixed where some of their bad debt figures
are a bit higher than we might expect and the others seem to have
been much better and such, does the Treasury have any view on
the macroeconomic effects on the different levels of tightening
of bank criteria, which might actually happen, the banks might
actually tighten up some of their criteria for lending? Is that
going to have any macroeconomic effects?
Mr Cunliffe: First of all, I think
they have tightened up some of their lending criteria, particularly
on the unsecured side rather than on the secured, and I think
that will affect a number of people. The question is: is that
number large enough to have a macro effect. That is really the
same question as: are we seeing in the distressed figures, people
who are experiencing difficulty. That is a very real problem for
a number of people, but are we seeing a macro effect? I do not
think so, but my colleague might want to say something on this
Mr Ramsden: We keep a close eye
on the survey evidence that Jon and you have been referring to.
We have had this very latest survey from the Bank of England which
presents a pretty balanced picture of the issues that households
are facing. We have to obviously take account of the fact that
it is a survey, so the extent to which it is representative, it
is an established survey and the Bank's assessment was that, compared
with last year, I think overall, and you have mentioned some areas
where there may be a small increase in the issues for households,
but I would not say they are statistically significant compared
with last year. We do, at the macro level, pay very close attention
to this. Obviously consumption is by far the most significant
part of expenditure, so we have to look very closely at what is
happening on the side of household finances, but whilst we factor
it into our risk assessment, I think the consumption forecast
that we have at the macro level is a measured one and there are
upside and downside risks to it. The key upside risk, I would
highlight, subject to the points Jon has made, is on house prices
where the latest data which came out yesterday on some of the
measures is showing double-digit inflation increases. Now, that
is well in excess of what we were forecasting, but we were standing
out amongst a lot of forecasters for saying that we thought there
would be a soft landing in house prices and, even though house
prices are in double-digit rates, they are still moderated from
where they were and we expect them to continue to come down to
grow more in line with income, but we are not expecting the kind
of real house price falls that some forecasters were projecting;
we have not seen any evidence of that.
Q142 Mr Breed: Finally, on the individual
voluntary agreements, are they working out as you broadly had
planned or are you very concerned at the number of people who
seem to be resorting to them for one reason or another?
Mr Cunliffe: They were designed,
I think, to make it easier for households to cope with debt problems
and to be able to adjust their debt and to smooth out the adjustment
rather than to have to go into a very sharp adjustment on insolvency.
I think the fact that they are being taken up shows that they
are meeting that need. There are a lot of stories about how they
are marketed and how they are being sold, I think, which the FSA
and others are looking at, but the general principle that we try
and find a way for households to make a smooth adjustment for
those who have debt problems, I think, is being
Q143 Mr Breed: So you do not know
whether or not they have not been over-marketed?
Mr Cunliffe: I do not think so,
Q144 Mr Todd: Can we turn to the
issue of external trade. How confident are you, bearing in mind
the data uncertainties there are following the MTIC trader fraud,
of trade data?
Mr Neale: We are pretty confident
that ONS is in a position to adjust the import figures, and it
is mainly the import figures which are affected here, as a result
of what we know about MTIC fraud. ONS works closely with Her Majesty's
Revenue and Customs who pass on to ONS their estimates of hidden
Q145 Mr Todd: So the answer is you
are fairly confident that the ONS are on top of it, but you would
not be too certain, bearing in mind our lack of knowledge of the
scale of the fraud in question?
Mr Neale: Fairly confident.
Q146 Mr Todd: You make a forecast
that import growth will be slightly less than export growth in
the period in question. On what basis do you make that judgment?
Mr Cunliffe: It comes back to
the macro side. I think we made that judgment on the basis of
the consumption forecast and the strength of consumption relative
to the strength of the economy and we make the export forecast
also on the basis of surveys for next year going forward which
are very strong actually as to order books.
Q147 Mr Todd: Turning to the impacts
of the US economy, you have presumably factored that into the
possible risks that the economy faces. How does this affect your
forecast for the period?
Mr Cunliffe: The US economy is
important to the global economy and there are some big risks out
there around global imbalances and the like which we have talked
about, but as for the specific trade channel to the UK, the US
is a much smaller trade partner for us than the EU. We have put
Q148 Mr Todd: Which of course has
a multiplier effect within the world economy as a whole.
Mr Cunliffe: Yes, and there are
other channels through capital markets and the like, but on the
trade channel itself, we have got a slowing of the US economy
for next year compared to where we were at Budget time. The US
had a very strong first quarter in 2006, so the likelihood is
that they will achieve 3% growth in 2006. Even though the second
quarter was a bit weaker and the third quarter was quite a bit
weaker, I think they will still be around 3% there. Going forward,
for 2007, most of the commentators have knocked them down by about
0.5% and we are not very different from that, and the IMF has
done that, the consensus has done that. That is really to do with
the drop in residential investment which they have seen going
forward, possibly some effects on consumption linked to housing,
the point for the US that we were just discussing. Furthermore,
for the UK, there have been some sorts of soft manufacturing survey
data and of for the US in November. On the other hand, some of
the consumption data which have just come forward have been strong
and the last labour market figures that came out on Friday for
the US were stronger than people were expecting, so our forecast
is for the US to slow in 2007, but not really for it to go into
Q149 Mr Todd: But you have built
into your forecasts some fairly confident export forecasts which
must be tough to achieve with the dollar at the rate that it is.
Mr Cunliffe: Well, the export
forecasts, I think, are affected more by the forecasts for the
eurozone. We have got the eurozone growing faster this year than
we expected, dropping back to about 2%, as I recall, next year
and 2.25% thereafter and that is a much bigger determinant.
Q150 Mr Todd: So you are expecting
some rebalancing of exports between the US and the eurozone within
Mr Cunliffe: Yes, and I am expecting
the very sharp decline in exports to the euro area that we saw
in the first three or four years of this century to correct somewhat.
Q151 Mr Todd: The decline of the
dollar might suggest some unwinding of global imbalances. Do you
think it does?
Mr Cunliffe: I thought the Chairman
was going to ask me that question. He always asks me about global
imbalances. I think the decline in the dollar that we have seen,
and, remember, it has gone down in the last four years by about
25%, is part of the unwinding of global imbalances. The question
on global imbalances is not so much whether they will unwind,
because I think most economists think they will, but how and whether
they unwind in an orderly way. Actually the dollar depreciation
that we have seen over the past four years has been pretty orderly.
The very recent one that we saw at the end of November was not
as big as the dollar depreciation against the euro certainly we
saw in the spring, but as it has been quite an orderly process.
Q152 Mr Todd: Presumably this would
be assisted by an appreciation of some other currencies which
Mr Cunliffe: It has appreciated
against the Renmimbi yuan a little bit and it has appreciated
against the yen, but clearly a more global rebalancing of the
exchange rates must be part of the overall global rebalancing
story. The question is: will it happen over a long period in an
orderly way or could it be disorderly?
Q153 Mr Todd: You have been criticised
by some for being too sanguine about the future path of inflation
with some of the uncertainties identified with the Bank of England.
How would you respond to that?
Mr Cunliffe: I do not think our
implicit inflation forecast is at all different from the Bank's.
Q154 Mr Todd: No, I did not say that.
I said they had identified certain uncertainties.
Mr Cunliffe: The uncertainties
we see are pretty much the same as the ones the Bank see. On the
supply side, it could be that there is more slack in the economy
and the economy has got the potential to grow faster without inflation.
Q155 Mr Todd: Could it be argued
that the Chancellor raising taxes in this PBR may have some impact
on inflationary transience in the future which may need to be
taken into account by the Bank in their future interest rate policy
since it removes some expenditure from the economy?
Mr Cunliffe: There is clearly
an arithmetical effect on the inflation rate of increasing the
fuel duty. Whether that will affect long-term inflation trends,
I do not think so, and actually the fuel duty increases have been
sort of pencilled in for the last year as part of the normal operating,
so no, I do not think that will have an effect on inflation transience.
Q156 Mr Gauke: Can I ask about the
trend growth assumption which has gone up from 2.5% to 2.75%.
Am I correct in thinking that the reason for the increase is because
of a reassessment of the net inward migration of working age population?
Is that a correct interpretation?
Mr Cunliffe: We have revised our
population growth forecast, but I should say that the trend growth
assumption for this year of and the past stays the same at 2.75.
What we have done is that we were going to reduce it from 2.75
to 2.5 because of the effect of the retirement of post-baby boom
female workers and that now, we think, is offset by the increase
in the population of about 0.2% and that comes mainly from an
assessment of current migration trends, yes.
Q157 Mr Gauke: What sort of numbers
are we talking about?
Mr Cunliffe: The GAD, Government
Actuary Department, forecast, although it is actually now done
by the Office of National Statistics, the forecast that they had
in their 2005 report was for net migration to come down from its
peak, and I think it was 235,000 or 240,000 in 2004, to a figure
of somewhere between 145,000 and 205,000. We are within that range.
It is not an exact figure because what we have done, it is an
assumption of population growth of 0.2, but it will be equivalent
to a figure of 185-190,000. But it averages out over the period.
Q158 Mr Gauke: Every year for the
Mr Cunliffe: I would say for the
next few years. The trend rate, until we change it. If you look
at the long-term report, you can see that once you get three or
four years out, it is very different and you have to forecast
Q159 Mr Gauke: Also, as I understand
it, you are not assuming a substantial increase from Romania and
Bulgaria post accession?
Mr Cunliffe: No, that figure seems
to have had no increased from the A2