Select Committee on Treasury Minutes of Evidence


Memorandum submitted by Sheila Dow, University of Stirling


  The main issue for the Inflation Report, the strength of the economic turnaround, has an important regional dimension: how does the severity of the turnaround differ among the regions? This is important for the regions themselves, and also for the UK inflation-unemployment trade-off, which worsens with widening regional disparities.

  The Inflation Report presents an analysis which is not expressed explicitly in terms of regional outcomes. It takes account of the reports from the regional Agents (pages 60-3), but apparently more as an additional source of up-to-date information than a means of identifying regional imbalances as such. Here we aim to draw attention to some regional decompositions of the Report's analysis, but it should be pointed out that the availability of relevant regional data is patchy.

  It is to be expected that some regions will fare worse than others in deteriorating economic conditions, particularly when these are due to external factors, since non-metropolitan regions tend to be more specialised and export-oriented than the metropolitan region. For example the recent volatility in the electronics sector, powerfully displayed in Chart C (page 23), is regionally concentrated (notably in Scotland). The latest CBI Regional Trends Survey (13 November) makes clear the regional differences in firms' expectations. For example, while export optimism for the year ahead fell in all regions, the West Midlands, Wales, Scotland and Northern Ireland reported the highest drops since the survey began in 1990.

  Without a regional index of retail or output prices it is not possible to identify regional inflation trends, although the regional Agents' reports provide useful information. Of particular significance is the weakness of prices of outputs in which several UK regions special (such as oil, agriculture and rural tourism). The terms of trade have therefore worsened for the regions concerned. Further, the latest ILO figures indicate a regional disparity underlying the turnaround in labour market conditions, with a disproportionate share of the increase in unemployment in the UK in recent months accounted for by Scotland, for example. Indeed, while unemployment is still historically low and the national claimant count only rose in the last month, there have been worrying signs of the turnaround for some time at the regional level.

  The Report demonstrates that the household sector (pages 14-8) has provided the strongest element of aggregate demand in the UK as a whole. The Scottish Retail Sales Monitor shows strength of consumer activity in Scotland in October, even though growth has been less than the UK average. But, as the Report points out, the UK household sector is increasingly financially fragile, with high levels of debt and weakening value of wealth. The degree of fragility will also vary by region, so that consumption growth may soon start to differ more by region. A slowdown in consumption growth will be most likely where employment conditions are weakest and where absolute wealth levels are low and expected to fall, discouraging further borrowing. These factors in turn will weaken local markets for goods and services, further weakening employment and investment prospects.


  Considering the regional differences in the severity of the economic turnaround, the Bank's relative optimism is open to question. From a regional perspective, the main impact of the reductions in the reporate since mid-September are therefore likely to be as follows:

1.  Credit conditions

  In regions facing weakening employment prospects and value of wealth (significant for securing debt), the terms and availability of credit are likely to worsen, inhibiting continued credit-financed growth in household expenditure and expenditure of small firms, in spite of a lower repo rate. Offsetting this to some extent, the interest burden of existing debt should fall, increasing disposable income, and encouraging continued growth in household expenditure.

2.  Uncertainty of expectations

  Aggregate demand is discouraged as much by uncertainty as by pessimism. The current danger is that uncertainty will exacerbate the normal multiplier effects of weakening expenditure growth in the worst-hit regions. The CBI Survey of Business Intentions indicates that uncertainty about demand now, much more than in the past, significantly outweighs cost of funds in determining firms' plans. The tone of the analysis of the Inflation Report and the presentation of the latest MPC decision, while taking on board weakening economic conditions, tended to be optimistic about the prospects of recession and to put limits on the degree of uncertainty attached to that optimism. The signalling effect of this relative confidence is likely to be much more significant, even for those regions facing particular weakening in demand, than the precise amount of the change in the repo rate.

  Accordingly, the current stance seems reasonable, but given the MPC's own declared uncertainty (measured by the width of the fan) further reductions may be required in the coming months.

19 November 2001

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