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Carney-age at the Bank

Bank caught between Osborne and reality
Duncan Milligan, Friday, August 7th, 2015

As the Bank of England dumped a data reservoir of cold water over Osborne’s claims of a ‘motoring’ economy and economic miracle, the Governor is spinning in no man’s land between the two views.


The cold facts say it all. Now entering our sixth year of Osborne austerity, the economy is still on life support.


Tory claims that austerity is over are hogwash. Osborne’s claim that the economic miracle is producing some economic sunshine for a motoring economy is bordering on delusional.


We know this because of what the bank of England did not do yesterday (August 6). It did not raise interest rates from their crisis low levels of half a per cent.


We also know this from the actual data produced in the last two weeks, and also yesterday by the Bank and others, and what conclusions can and were drawn from the information.


Manufacturing is not motoring on. It has done an uncontrolled handbrake u-turn, rather worse than a gentle stop and engaging reverse gear.


The ‘march of the makers’ can’t even run out of steam. It never generated enough steam to get started in the first place.


Productivity has been in the doldrums for eight years. Pay rises have been very subdued, running below inflation.


Seven years of real falls in what pay can buy will not be reversed for many years. The bit of wage inflation we might now be seeing will not put that right any time soon.


And, by the way, does anyone know anyone who has had a pay rise of more than 3 per cent? That is apart from company directors, the City boys and the other casino capitalists.


Signs of growth (gross domestic product) are dismal. Much of it down to population growth and people spending money they don’t have on goods they can’t afford.


There is no fundamental underlying strength behind that growth.


Our balance of payments – what we import from abroad against what we export abroad – is terrible. The increasing value of the pound is sucking in cheap imports and making our goods more expensive to export.


We’re now at the level we were at shortly after we sent Napoleon into exile and before Victoria took the throne. That is, we are buying in far more than we are selling abroad.


Whatever happened to Cameron and Osborne’s export drive?


Dead parrot sketch

Like the Monty Python parrot sketch, everything points to the UK economic parrot being in poor health. It’s not dead, but it’s still in intensive care.


The only one in denial is the pet shop owner who, like Osborne, insists the parrot alive, kicking and robust despite the obvious signs to the contrary.


The UK ‘economic parrot’ is in fact in poor health. That’s the big story behind the Bank of England interest rates remaining at the crisis levels they have been at for six years.


And the big story behind their figures.


The inflation dip to zero is not a very short-term blip after all. The Bank thinks inflation might be back to its target 2 per cent in around three years’ time.


Why would a bank which did not raise interest rates when inflation was 5 per cent want to heavily flag up that it might raise interest rates when inflation is near zero? And that inflation won’t even hit is target of 2 per cent for three years?


There are very few signs that our economy is ‘motoring’ as Osborne says. And Governor of the Bank of England, Mark Carney, is in danger of slipping into Osborne dead parrot territory.


Carney and his colleagues are clever and capable. But Carney was torn between claiming the economy had ‘robust momentum’ and explaining why the bank overwhelmingly voted to keep rates at crisis low levels rather than raise them.


And that none of the recent data suggests anything like an economy powering forward.


Carney has been trying to explain why – for nearly two years now – he has been warning that interest rates might have to rise sometime soon. Those warnings dovetail with the Osborne delusion the economy has recovered and is motoring on.


Carney is in danger of getting the same reputation as the boy who cried wolf. At some time he may have to warn that interest rates will rise, but who then will believe him?


There is nothing yet on the horizon which suggests that inflationary pressures will warrant an interest rate rise before the middle of 2017 or maybe beyond that. Things might change but it needs to be based on actual data, not on the reading of tealeaves.


Everything points to a fragile UK economy bobbing along in a deepening trough of world-wide economic slowdown. The cost of oil has fallen steeply, it might remain around current lower levels or could dip lower when Iran turns the oil taps on at the end of the year. None of which has benefitted the UK consumer.


What will happen? Pick a forecaster, read some tealeaves or flip a coin. Or wait and see.


The cost of commodities used by manufacturers is also falling, things like copper and sugar. There’s an upside and a downside to that, such as dipping into real deflation.


But the Bank of England does not need to play footsie with the Osborne delusion. Governor Carney has his work cut out trying to avoid choking off recovery by raising interest rates.


And that has to work with an exit strategy from the huge sums of money printed by the Bank and pumped into the financial system to stop it from collapse. This quantitative easing, as it is known in the jargon, has reached levels never seen before.


Carney and the Bank have no easy route map out of that problem – no one has been there before. But aping Osborne’s rhetoric that the economy is motoring on the sunshine of his glare will only make that journey worse.


Britain needs a pay rise not a rate rise. As Unite assistant general secretary Tony Burke told UniteLive: “It’s good news that interest rates have not been raised. That would have choked off the few signs of life we have in the economy.


“We’re now in our sixth year of an austerity experiment which has not worked. It’s not worked for manufacturing or those in the public services. The value of wages has been hammered. There are no real signs of a strong recovery from that, certainly not for 3.8m public sector workers.


“And those working in the public sector have seen a massive drop in their purchasing power.”


“The UK has been good at creating low paid, low skill jobs with low productivity. We need to be better at creating much more high paid, high skill, highly productive jobs driven by investment and training.


“Instead of taking the road to prosperity, Osborne has side-tracked us down the rocky path of austerity. This country needs to get back on track to creating a strong recovery and stronger economy. And the first thing the government could do is to provide an industrial strategy.”



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