Interviewed by the Daily Telegraph Friday 19th October, the outgoing deputy governor of the Bank of England Mr Tucker claimed that the Bank’s policy of quantitative easing (QE), that has pumped £ 375 billion into the UK economy by means of purchases of UK government bonds from financial institutions, is finally working.
He was quoted as saying: “We’ve provided an extraordinary degree of monetary stimulus and the whole euro area crisis was like switching it off. I felt that as soon as [fears] receded, spirits would revive and the existing monetary stimulus would gain traction. And I think that’s what has happened.”
Like all central bankers these days, Mr Tucker is a “data driven” economic soothsayer. The credibility of his claim hinges on the UK’s officially recorded 2nd quarter 2013 GDP growth rate of 0.7% and the soon to be published 3rd quarter rate which is expected to be 0.8%.
So are there now grounds for optimism first, of a genuinely sustainable economic recovery in the UK; and secondly, that the Bank of England’s QE policy is vindicated ? Or is the outgoing Deputy Governor “talking his book” in an attempt at protecting his legacy role in the Bank’s management of monetary policy in the period following the financial crisis of summer 2008 ?
What of the purported recovery in the UK economy then ? In the private sector it is evident that there is increased activity in the housing market, with house prices returning to pre-crisis highs in London and much of the south east of England. However the rise in buying and selling is being driven primarily by a change in lending policy by banks and building societies who, recently gifted £80 billion spending money from the Chancellor of the Exchequer in the “Help to Buy” scheme, have substantially increased mortgage lending at low rates of interest for the first time since withdrawing mortgage credit from the housing market in the aftermath of the last burst “bubble” of 2009. This has little or nothing to do with QE.
Elsewhere in the private sector, there is no evidence of improvement in either exports or private business investment. The Chairman of the Office for Budget Responsibility, Robert Chote, stated earlier this month that private investment, particularly from business, had been “almost completely absent” since the outbreak of the financial crisis. His statement is supported by revised data for the 2nd quarter of 2013 published by the Office of National Statistics regarding gross fixed capital formation (GFCF), of which business investment is one part.
Whereas GFCF for that 2nd quarter did rise 0.8% compared to the previous quarter, all of that increase was accounted for by a massive 14.1% growth in “General Government” spending. Furthermore, 2nd quarter GFCF was 5.3% lower when compared to the quarterly figure 12 months previously. The category suffering the greatest per cent fall in capital formation was “other machinery and equipment” with a collapse of 11.2%.
To summarise, in the real economy investment still trends lower with the sole exception of the government’s own spending. The worst hit category of investment is precisely the one that has the greatest potential to generate productivity gains, namely machinery and equipment. The upturn in the private housing market has all the characteristics of an incipient “bubble” blown by the £80 billion largesse of cheap money supplied by the UK government to banks to fund mortgage credit. Lastly, any GDP growth effect from consumer demand is merely transient driven by rising personal debt levels and reduced savings ratios. The bigger trend for households is a continuing decline in real disposable incomes.
An exclusive focus on the recent performance of the UK’s real economy is not, of course, the whole picture if the aim is to assess the “success” of QE. A very different dynamic emerges if we consider the stock market, bond markets and the financial sector.
Nevertheless, both central bankers and governments are determined to sell to the public at large the belief that there is a recovery in the real economy; one that they have engineered and should be applauded for as the next pre-electoral cycle shifts into gear. Their own published data – suitably sanitised and manipulated – fails to support their argument.
PART TWO to follow