Cut rates as recession gloom deepens, Bank man demands

Have you ever heard of Blanchflower ? You have now. To most of us, the name conjures up fond memories of two great Belfast footballing brothers of the 1950s and 60s. But now there’s a new Blanchflower – David. (no relation as far as I know). David Blanchflower moves into history as the first member of the Bank of England monetary policy committee (MPC) to break ranks and give a stark warning of deep recession – in public. You aint seen nothing yet, is his jist.

He forecasts 330,000 more people losing their jobs by the end of the year – banks and construction firms being the first to lay staff off. He’s got some evidence on his side. As the Guardian reports: “Fears of recession this winter intensified.. with High street sales in Britain falling at their sharpest pace in at least 25 years this month and the Nationwide building society reporting house prices falling at £150 a day… ”

Against that background, Blanchflower says: “I think people have become complacent and they have not understood what would happen if an economy starts to slow fast, if firms start to close. What we have now is a turning point in many ways – certainly you might think of it as a paradigm shift. We have a global financial crisis, an oil shock coming [and] people with little experience of what is really going on.”

The MPC last made a quarter point cut way back in April. Will it heed calls to make new cuts anytime soon? A Reuters poll of economists doesn’t think so.
British interest rates will remain flat until early 2009 but the chance of a cut this year is on a knife edge in the face of a flagging economy and as long-term inflation prospects ease. All 67 economists polled between August 26 and 28 said the Bank of England bank would leave rates on hold at 5.0 percent when it meets next week despite growth coming to a virtual standstill, but deeper and faster cuts are now expected next year”.

But a year in economic life is an eternity. Like those economists, policymakers must be hoping that as growth stalls, falling prices will give UK business an opening to boost exports and output generally. Picking the moment to back business by cutting interest rates from the present 5% will require fiendishly fine judgment. Blanchflower’s call for action now has few takers. No one expects Gordon Brown to resile from his first act as Chancellor and widen the Bank’s anti-inflation brief by adding to it the need to stimulate growth. But arguably the Bank is firmly impaled on a cleft stick already. Deprived of the old option of a quick-fix cut in rates, the political stakes are rising sharply for Brown as he prepares to launch an autumn package to blunt the roughest edges of the downturn. Like Barack Obama, he’s got to give us hope. The package had better not be an anti-climax.

  • The Raven

    “Like those economists, policymakers must be hoping that as growth stalls, falling prices will give UK business an opening to boost exports and output generally.”

    And yet, this piece from yesterday’s BBC reports seems to have gone un-noticed.

    http://news.bbc.co.uk/1/hi/business/7586280.stm

    As an aside, part of my work takes in business starts in Northern Ireland. The local enterprise agency in this area has already met its annual target for business starts. The will to move forward is there – the zeitgeist, it would suggest, is a major factor in things NOT moving forward.

  • Jean Baudrillard

    There have been mixed opinions on the 3.3% US figure. See here

    In short: “It’s a big flashy number, but it probably doesn’t mean all that much.”

    It was almost entirely due to a fall in the US trade deficit.

    This is actually bad news for places such as Northern Ireland.

  • The Raven

    I certainly agree – in the short term. But I come back to point made by myself and Comrade Stalin, IIRC – that the perception of things being worse is almost as bad as that being true.

    I come back to the small business starts in my own part of the world. Just by the by, they have a 86% success rate for three year survival, and create around 1.6 job each, a figure verified by PWC recently.

    There are excellent opportunities out there for small business if they just reach out and take them.

  • IJP

    Brian

    You’re really going to have to stop putting up all these completely relevant and very important posts. You’ll never get any comments this way! Put up something about an all-Ireland football team and you’ll soon get the comments flowing!

    I suspect Blanchflower is right, by the way. House prices are vastly over-inflated and people are still spending money they don’t have (and on things that can’t be sold back, like holidays or kitchen renovations).

    Economists like to make economics sound complicated, but in some ways it’s really not – having an entire population spending money it doesn’t have with no assessment of risk is bad.

    One final thought: the way commentary on this goes in the BBC and elsewhere, you’d think the English-speaking world is the only one with a problem. Don’t forget, economic indicators for France and Germany (two countries I’ve visited in the past week) are almost universally worse than they are for the UK. This is a worldwide slowdown and it’ll take a few worldwide solutions.

  • aquifer

    The country has been awash with borrowed money for years, lots of it spent on property speculation and luxury goods. That capital inflow has stalled, so people have to think about making real profits for a change. I think the ‘peace boom’ has given people confidence though. Many now have lots of equity in their houses that could be used to borrow to do something productive and profitable, especially if they form a company in the Republic. Low taxes and cheap borrowing, and easy access to UK markets and suppliers. What’s not to like? And if the public sector butter can be spread a bit thinner or thrown as well-aimed balls NI can come through this better than any other UK region.

    With our reluctant leaders’ permission of course.

    Against that, a fall in employment could leave a lot of people struggling to pay for the basics, and some will have to sell homes in a market that could still fall further.

    PS Some interesting research on long term worklessness shows that taking low paid temporary and casual work can be more bother than it is worth, in terms of having to reclaim benefits afterwards etc. Instead of enforcing idleness and rewarding sloth with a reliable pittance, should we make benefits more variable, and have periods where people can keep their benefits in addition if they work? Trouble is that benefits are not a devolved power.

    Rates are, and postponing rises in property taxes for the relatively rich suggests than the poor are not a huge priority for our executive.

  • The Raven

    Aquifer, good point you make there about the benefits. I personally think that the new deal model for those who are unemployed is quite good.

    I do recall being told that in the early days of the Celtic Tiger, Government made a provision of “sliding” benefits for those who were starting their own business? I’d like to see that here. Also I would like to see business improvement zones implemented in all our towns – with special provision for those rural villages which are feeling the pressure.

    As an aside, all Councils here will be under severe pressure not to raise rates – especially non-domestic rates for the coming year. Problem is (correct me if I get my proportions wrong) local government only has control over about 40% of the take.

    However the virtual Nazi position of the RCA means that will never happen.

    Oh for politicians that “make things happen”….

  • Brian Walker

    A Summary here of the points that struck me
    then a thought from me.
    I would like to see business improvement zones implemented in all our towns The Raven

    I think the ‘peace boom’ has given people confidence though. Many now have lots of equity in their houses that could be used to borrow to do something productive and profitable, especially if they form a company in the Republic. Low taxes and cheap borrowing, and easy access to UK markets and suppliers. acquifer

    France and Germany (two countries I’ve visited in the past week) are almost universally worse than they are for the UK IJP

    The local enterprise agency in this area has already met its annual target for business starts. The will to move forward is there – the zeitgeist, it would suggest, is a major factor in things NOT moving forward. hey have a 86% success rate for three year survival, and create around 1.6 job each, a figure verified by PWC recently The Raven

    Trouble is that benefits are not a devolved power.
    Rates are, and postponing rises in property taxes for the relatively rich suggests than the poor are not a huge priority for our executive. acquifer

    My own comments.
    First, don’t knock the public sector as I’ve said before. But it should be used to cushion the impact of a switch to private investment with public capital support, not just something to sit on.

    Second, devolution is in Catch 22. Its just a spending agency which discourages innovation. Unless it gets some taxation powers beyond the present rates, they will never innovate. What incentive do they have to raise utility prices and water charges? The economic logic is there but the introverted political logic is against. Its much easier to ride out the cycle on the cushion of public spending. To replace Barnett whose convergence is now biting, new powers of local taxation plus targeted and equalisation payments from Westminster should encourage public savings and capital investment.

    And lower corporation tax for the whole UK – but not yet, O lord.