Select Committee on Treasury Minutes of Evidence


Memorandum submitted by Bridget Rosewell

  The Bank of England says there is only a 10 per cent chance of a recession—the central projection shows growth falling only a little below 2 per cent in the middle of next year—and on current interest rates.

  Is this unduly optimistic?


  The optimism about 2002 appears to be partly based on the strength of the current situation. Though investment, exports and manufacturing are suffering, the consumer is standing firm, with spending growth above the rates expected in August. In addition there have been revisions to statistics which have made 2000 a less good year and the first half of 2001 rather better. All of this means that the starting point from which the economy is now declining has been revised up.

  The first estimates for growth in the third quarter was only a little lower than the second quarter. Consumer confidence fell in October, but not dramatically. Retail sales have held up. Retailers are reasonably confident that sales will do well up until Christmas although the mood is undoubtedly fragile.

  However, business confidence has collapsed, particularly in manufacturing and exports are doing particularly badly.

  Poor exports, combined with strong consumer growth means problems with the balance of payments. Although imports have also dropped back in recent months, with lower imports of components in particular, this is an under-reported problem. Indeed, the balance of payments is hardly mentioned in the Inflation Report.


  It is not clear that it is reasonable to believe that simply because the starting point has improved that there are as few problems as the Inflation Report suggests. It is true that there is scope for further cuts in interest rates if the slowdown turns out to be worse than expected here, and the Report refers to this possibility.

  In my view, this gentle downturn envisaged by the MPC is incompatible with the loss of confidence and general uncertainty being seen across the world. The outlook here is consistent with the picture that might have been expected before the events of 11 September. No amount of interest rate cuts will compensate for a major loss of confidence. In addition, low inflation takes no hostages if a mistake is made in taking on debt. Inflation will not rescue those who take on too much. This will become increasingly obvious during 2002 and will depress recovery.

  Business difficulties are likely to continue in 2002, particularly as the consumer is likely to draw in her horns in 2002. Though this may not mean a fall, this will no longer compensate for weakness elsewhere. Moreover, the balance of payments problems will become more visible and some will be calling for higher interest rates to correct this, even though inflation will not be in evidence.

  Market weakness is therefore likely to continue to bedevil the equity markets, which will give both bonds and property a higher profile. There may continue to be a reassessment of the proper percentage of portfolios that should be held in property.

  On the other hand the high worth residential market will be affected by low bonus levels, though low interest rates will entice some into larger mortgages.


  I believe that the chance of an actual recession is rather higher than the Bank does—20 per cent. However, the most likely outcome is for a slow down in the economy continuing into the summer and just dipping below the zero line. This is still worse than the position forecast in the Bank's report.

20 November 2001

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