Growth Spurt

29/10/2010 at 11:52 am

Congratulations this week to Mr Ross Walker of RBS. Of the 30 professional economists whose forecasts were listed on Bloomberg in advance of Tuesday’s release, he was the only one to anticipate the strength of UK GDP growth for the third quarter: +0.8%.

Cumulative growth over the last four quarters now stands at 2.8% – about average for the typical year, though leaving some way to recover the 6.7% lost over the course of the recession.

The strength of this performance raises a number of interesting issues. One of them – pace Mr Walker – is its seeming unpredictability. In his emergency Budget (June), the Chancellor cited GDP projections from the newly-formed Office of Budget Responsibilty of 1.2% for 2010 and 2.3% for 2011. At least one of those figures now looks comfortably overshot. Much more of the same and the age of austerity could be over sooner than we have been led to expect.

In the Bank of England’s August Inflation Report, the gnomic “fan chart” prediction for GDP growth seems a little closer to the mark: about 2.5-3% for both 2010 and 2011. But that brings us on to another point of interest – a trend rate of growth hardly suggests disinflationary pressures sufficient to warrant continued emergency levels of monetary looseness (as the Bank admits on p. 48 of its report, its track record of accurate growth predictions is complemented by a history of underestimating UK inflation rather dramatically).

Assuming that the last few quarters do not represent a false dawn, there seem to be two possible futures for the British economy. Either the government and the Bank accommodate themselves to the possibility of a more rapid recovery than expected, or they persist as if growth of 2.8% still represented the pitch of doom. In the first case, we should soon expect to see higher interest rates as part of a return to business as usual. In the second, we should expect to see higher interest rates rather later as a panicked reaction to the entrenchment of a serious inflationary problem.

This blog has observed before that the persistence of inflation presents the Bank with a tightrope walk, having to balance the risk of destabilising recovery against the reality of the erosion of incomes and wealth. The more data we get like we did on Tuesday, and it will look as though the Bank is not so much walking a tightrope as galloping towards a policy mistake.


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