MacroScope

Slowing growth, MPC splits? That’s so 2008

July 21, 2010

Sixties nostalgia was all the rage in the late 90s, and towards the end of the last decade we looked back only 20 years or so for a massive 80s revival in electronic pop and fashion.

INDONESIA/With the 2010s in full flow, the current vogue of choice derives from just two years ago – at least among those noted trendsetters, economists.

Back in mid-2008, the signs for the UK economy were confusing and ominous. Inflation was too high, forward-looking indicators pointed to a slowdown of some sort in the near future, and the July minutes of the Bank of England’s monetary policy committee showed they debated both easing and tightening interest rate policy.

Step forward into 2010. In Wednesday’s July MPC minutes they discussed both easing and tightening while digesting a puzzling picture of – yes – high inflation and forward-looking surveys pointing to a slowdown of some sort in the near future.

“Do we have a much clearer idea over where monetary policy is going in the rest of the year?” asked Investec economist Philip Shaw after seeing the latest minutes.

“No. It’s shrouded in confusion,” was the stark conclusion.

Reuters’ latest long-term UK economy poll underscored this familiar sense of doubt. It showed a range of some 2.7 percentage points separating the lowest and highest forecasts for UK economic growth next year, compared to a 2.4 percentage points gap in the corresponding forecasts from the July 2008 poll.

So is this just a mid-2008 throwback, or is history repeating itself? Economists at least were at least fairly confident about avoiding a double-dip recession over the next 12 months in the latest poll, giving just a one-in-five chance.

But the same time two years ago, they said there was only a 40 percent chance Britain’s economy would start shrinking within a year. We now know the UK was already in recession when they made this prediction.

Economists are understandably cautious about the outlook from here. Banks ought to be much better capitalised by now, but there are good reasons to think a great deal of havoc may yet be unleashed onto the economy from the UK’s still-inflated housing market.

So it’s fingers crossed for the next few months, at least until it’s clear the similarities with 2008 turn out to be as anachronistic as phrases like “subprime containment” or “decoupled economies”.

After all, the economic fashions of the past two years are not ones anyone would like to revisit.

UPDATE: A little more grist for the mill. MPC member Spencer Dale told The Independent how the traditional balancing act of monetary policy has become much more acute, and offered this comparison:

“It has the flavour of the challenges we faced in 2008 – substantial downside risks to growth but also upside risks to inflation staying above target and feeding through into wages and price setting.”

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