This morning's GDP data from the Office for National Statistics suggests the UK is still heading for deeply troubled times, courtesy of the Bank of England.
- Monthly real gross domestic product (GDP) is estimated to have grown by 0.2% in April 2023, after a fall of 0.3% in March 2023.
- Looking at the broader picture, GDP grew by 0.1% in the three months to April 2023.
- The services sector grew by 0.3% in April 2023, following a 0.5% fall in March 2023, and was the main contributor to the growth in monthly GDP in April.
- Output in consumer-facing services grew by 1.0% in April 2023, following a fall of 0.8% in March 2023.
- Production output fell by 0.3% in April 2023, after growth of 0.7% in March 2023.
- The construction sector fell by 0.6% in April 2023, following growth of 0.2% in March 2023.
Most people might think growth is good. Certainly, Rishi Sunak does. He has promised it to the country.
But Sunak's opinion does not matter. All that matters is that of the Bank of England, however mistaken they might be. And on top of ONS wages data from earlier this week that showed that private sector wages have only fallen in real terms by under 2% in the last year and that state sector wages have in real terms only fallen by a bit over 3%, this new growth data will be triggering alarm bells at the Bank of England.
The reason is easy to explain. The Bank of England has only one job to do. That is to cut inflation. And so far, they are not doing it as well as other countries, like the US, where it is now around 4% and the EU, where it is now around 6%, when it remains over 8% here in the UK.
The Bank also only has one tool to control inflation. That is crashing the economy. I know it is said that the only tool is the bank base rate, but that is no longer true. They can also use quantitative tightening, which means the Bank sells off gilts they own that were bought during the quantitative easing years. This reduces the money supply by reducing the supply of credit to markets, and without credit nothing grows. So, let's summarise their available tool as crashing the economy, whichever way they can.
As markets are aware of the Bank of England's lack of sophistication and small-minded obsession with eliminating any hint of economic well-being, most especially when it comes to those with the audacity to borrow to put a roof over their heads, those markets are expecting the Bank of England to push up interest rates again, soon. This was the 2-year gilt yield chart first thing this morning, as reported by Market Watch:
The market is now forcing two-year gilt rates above those seen after the Truss / Kwarteng fiasco (which was never their fault - much as I hate to say it - because it was actually triggered by the Bank of England announcing £80 billion of quantitative tightening the day before Kwarteng spoke, and that is what spooked the markets - as we know as an immediate dose of quantitative easing thereafter calmed them again).
I suspect this 2-year gilt rate will go higher.
I also suspect the Bank of England base rate to rise, again.
I am sure that this will increase mortgage rates, again.
And I am quite certain this will not have the slightest impression on inflation, which will continue to come down but more slowly than elsewhere because of Brexit and the absence of free movement in UK labour markets.
So this morning's rise in GDP is not good news, at all. It just heralds more misery for borrowers care of Andrew Bailey and his cast of misanthropes in Threadneedle Street, where the Bank of England appointees to the Monetary Policy Committee (at least) seem to share a dislike for humankind whilst enjoying its suffering in a way that is very hard to understand.
And meanwhile, all the excuses for yet more government austerity will be practised by Jeremy Hunt and Rachel Reeves.
When you're in an economic death spiral like the one the UK is in now, it is hard to see a way out unless someone appears who might break the inevitable decline by cutting interest rates, increasing government spending and revisiting Brexit. With no such person on the horizon, we're in very deep trouble.
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I was so dismayed to hear this on the radio the other day.
It’s quack-doctoring by the Bank of England and nothing else.
And I keep hearing now that it is the fault of the largely less than inflation wage rises happening – according to the media – the same media that tells us strikes by doctors are disrupting patient appointments – not poor pay.
Truth is a rare commodity in modern Britain today – care of fascism of course.
Death spiral? From the Treasury point of view, inflation does wonders for the National Debt.
Through history inflation has been more effective than austerity in reducing the national debt; which is a major reason it is typically measured as a ‘relative’identity (a percentage of GDP), when Government wants to claim it has ‘fixed’ the problem; and uses the raw data and recent increases in Debt, when it wants to frighten the public, to justify austerity.
There is no “national debt”. Outstanding treasuries are paid for the same way fiscal spending is: created through keystrokes on a computer. Your obligations mean nothing when you have a printing press. I know you’re thinking of price inflation, but fiscal spending and GILT issuance grow the economy, and are thus, not inflationary, 99% of the time.
You start correctly
Your conclusion is false
Government spending can be inflationary if there are insufficient resources to buy
I said 99% of the time. The proof is that the Tories had the biggest fiscal deficit in history during COVID, and inflation was under 3.5% the entire time. The inflation brought about in 2022 was due to energy price hikes, and I shouldn’t have to tell anyone that energy prices are reflected in the cost of ALL goods and services; then the other big firms joined in by hiking their prices (proof: https://fred.stlouisfed.org/series/A053RC1Q027SBEA).
UK companies did much the same, and remember that American companies also have UK customers.
Public sector spending, grows the economy, and is also income for the private sector.
You ignore the fact that QE neutered severe, deflation inducing, austerity throughout this period. It is at least plausible the net effect was no inflation.
No, I am using the term ‘national debt’ to describe the state money issued but untaxed, lent back to the Government as the most secure investment available (in Gilts etc) as the ultimate ‘safe asset’, on which government pays interest; and that fact (ultimately almost everyone is looking fo a safe, low risk haven for investment, not just the risk avoiders); which is then used by Government to emphasise this is all an egregious burden on the state, to justify austerity. In times of high inflation however, while the annual cost of interest rises, the total debt “burden” (the purchasing power value of the Gilts on redemption) falls more rapidly; the opposite is true in times of low inflation.
As a matter of incontrovertible fact Britain has a long standing obsession with debt repayment. Indeed, the biggest “bust” in British history was caused by a British Government three centuries ago, which decided to eliminate the national debt altogether, by privatising it. The neoliberal principles of Sunak and Kwarteng are really not new at all. and scarcely more sophisticated; because the disasters keep happening, even with the knowledge of three hundred years of (only too often) Conserative/Tory blunders to learn from. The South Sea Bubble began essentially with a shifty Tory scam, cooked up because they didn’t like the new, Whig Bank of England (they used an off-the-shelf, empty shell company; the Sword Blade Company, as the Tory answer to the Bank of England; no, you really couldn’t make it up!). Truss/Kwarteng in its monetaryimpact was a pop-gun compared to the South Sea Bubble bust; no thanks to the Conservatives – whose remarkable success is to win elections in spite of their brazen financial incompetence; then, now and endless).
There was no QE in 2020/2021; moreover, even if there was, it would buttress my point, since QE is inflationary. So, QE program in progress, AND a record fiscal deficit, and still no inflation? Utterly proves me point
I think you have lost the plot
There was well over £200bn of QE in 2020/21
I suggest you give up
“Utterly proves me point”.
I wish I knew what it was.
There seems to be a pathology at play here: gov’ waving its hands and claiming there is nothing it can do because:
the BoE is “independent” (well done Mr Brown) & self selecting.
Ofgem regulates (?) the (independent) power sector
Ofwat regulates (?) the (independent) sewage river sector
Ofteach regulates (?) schools
etc etc
Gov by quango…. “it’s not us that are responsible – complain to Ofxyz”………..is it me or did a vile-tory gov once talk about abolishing quangos?
Regarding wages, I was surprised to read:
Pay rise surprise leads to forecasts of higher interest rates
BBC News. 13 Jun 2023. https://www.bbc.co.uk/news/business-65876822
“UK wages have risen at their fastest rate in 20 years, excluding the pandemic, raising expectations that UK interest rates will have to rise.”
No indication on what data was include. All wages? Just the top 5%?
No, just the people are not suffering enough
That is the message being amplified
Wages have risen at the fastest rate for 20 years. But so has inflation and wage rises are still 3% + below inflation. So wages haven’t risen in terms of spending power, they have dropped.
Correct
“Wages have risen at the fastest rate for 20 years. But so has inflation”
That’s what I missed, inflation has risen far more than wages.
No morals in the government or Bank of England – won’t tackle the true causes of inflation or use methods of ameliorating it for those on low incomes. Weimar Germany comes to mind and creating fertile ground for communists and fascists to argue you can’t make an omelette without breaking eggs as the only way to sort the mess out.
from todays’ Guardian
The chancellor said the government would be unstinting in its support for the central bank to do what it takes to squeeze high inflation out of the system amid the cost of living crisis.
Oh, for politicians who understood the real world!
It seems the Bank of England is making the same blunders as it did in 1931. Orthodox economics. My Grandad,a miner used to rail about “the bankers ramp”. As a boy I didn’t really understand what he was talking about. Something about the bankers undermining the second Labour government and causing the Great Depression. Could we be in for another Depression, Richard.
It is possible….
Pardon an ignorant medievalist, but in what practical sense is the BofE ‘independent’ of government?
The reality is that it is not independent of government at all. Under the terms of the Bank of England Act 1998, section 19, the Chancellor of the Exchequer can at any time overrule the actions of the bank if he thinks it essential to do so. The inevitable reality, as a consequence, is that the Bank of England does what the Chancellor wants, but provides them with the disguise of not being responsible.