Tue, Nov 18, 2003 - Page 9 News List

Bank of England's complacency does nothing to dispell bubble worries something

London's financial community is concerned that warning signs are being ignored and mistakes of the past are being repeated

By William Keegan  /  THE GUARDIAN , LONDON


British Chancellor of the Exchequer Gordon Brown may like to preach to the rest of Europe about how to run an economy, but, as the latest British overseas trade figures show, the UK's own performance leaves a lot to be desired.

It appears that Britain ran a trade deficit of ?4.8 billion with the rest of the world in September, equivalent to 4.3 percent of GDP, and the largest since records began.

Some reports note that, since records began more than 300 years ago, this is the biggest deficit for 300 years, but then you would expect it to be bigger than in, say, the year 1703. What is interesting is that for all the boasting about the UK's strong economy, Britain has now, as Bank of England Governor Mervyn King pointed out at a press conference yesterday, experienced seven years in succession when the growth of imports has exceeded the growth of exports. That means, in the official jargon of economists, "net trade has made a negative contribution" to the growth of GDP. And, yes, the deficit grows bigger every year.

True, thanks to the City of London and other services, the UK runs a net surplus on "invisible" or "non-merchandise" trade. But even so, there was a record current account deficit of pounds Sterling 3.9bn in September after taking allowance for this.

King, who was introducing the Bank of England's quarterly inflation report -- which gives the background to last week's quarter point rise in UK interest rates to 3.75 percent -- emphasized that the trade deficit position was "not sustainable."

In saying that this "may or may not require a change in the exchange rate" he at least raised the possibility that the pound would have to depreciate further in order to correct the imbalance (depreciation works by making imports more expensive and exports cheaper or more profitable).

The governor also reminded the nation that the success of the Bank of England's monetary policy committee (MPC) in holding inflation down to 2.5 percent between 1997 and last year owed a certain amount to the impact of the higher pound in offsetting domestic inflation.

Thus the strong pound has been good for inflation but bad for exports, investment and the future productive capacity of the economy.

As if to prove his point about the sensitivity of the inflation performance to the exchange rate, King noted that inflation has now been above target for almost a year -- a period during which the pound came down against the euro.

The Governor also made it clear that the MPC's forecast that inflation would now remain close to target was dependent on the action the Bank took last week to raise interest rates and take a little steam out of the economy, which is growing at close to its long run trend of about 2.5 percent per annum (that is, in real terms, after allowing for inflation).

What of the widespread feeling that Britain is once again experiencing a bubble in house prices and accumulation of consumer debt which will end in tears, just as the Boom in the British economy collapsed in the late 1980s?

Here the committee that makes the key decisions on interest rates seems to be taking a more relaxed attitude than one might have expected.

King took a swipe at "scare headlines" in the press, and said that while some borrowers may have been imprudent, he did not think the problem was on a scale of wide economic significance.

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