Collectively the economy as a whole needs to rebalance and the significant external trade deficit built up pre-crisis needs to constrict further to be sustainable in the medium term, the Bank of England has said.
Paul Fisher, the bank’s executive director for markets and a member of the Monetary Policy Committee, highlighted in a speech why the slow recovery from recession that the economic data has been “disappointing for some time”.
He argued that trend growth should be more like 0.6 per cent a quarter yet the UK has only had five quarters of growth at that rate or higher in the 21 quarters since the start of 2008. There had been no such weak period in the UK since quarterly GDP data were first published in 1955, Mr Fisher said. He goes on to offer a possible explanation.
He said: “It is as if the different groups within our society have all decided that their future financial positions, on average, will be worse than they thought before the crisis.”
On a positive note, he highlighted that households are saving more than they were pre-crisis and that one likely reaction to lower expected incomes is for people to try and work harder and to avoid unemployment if at all possible.
At the same time, he says, the government is trying to reduce public expenditure, the financial sector is addressing balance sheet issues, and UK businesses continue to save rather than invest as much as they could.
He said: “Collectively the economy as a whole also needs to rebalance. The significant external trade deficit built up pre-crisis needs to close up further to be sustainable in the medium term.”
Paul Fisher says his own policy vote as an MPC member has been driven by the need to continue supporting the required real adjustments, but “cautiously, so as not to risk inflation expectations becoming de-anchored”.
He notes that the Bank has been particularly active in seeking to support the real adjustments in the banking sector, with the extension to the Funding for Lending Scheme, and the Financial Policy Committee’s complementary capital recommendation.
He said: “Monetary accommodation should generally be helpful to balance sheet rebuilding, but there are limits.”
By way of example, Mr Fisher said he is not convinced that a further reduction in interest rates would stimulate demand at this stage.
He said: “Working from such a low level of interest rates, we do not know for sure whether those effects remain the same, given pressure on the incomes of savers and high debt levels of borrowers: further cuts in rates may not feed through to higher consumption in the normal way and some of the effects could even be perverse.”
