The times they are a changing
Former university bandmates ex-MPC member Andrew Sentance and current BSA Chairman Dick Jenkins reunited on stage for the opening session of the BSA Annual Conference in London. They resisted breaking into song, and instead Dick invited Andrew to give his views on the outlook for the economy as the Brexit process takes place.
Andrew started by noting that global economic output has been growing close to its long term trend, and this looks set to continue, which will provide a supportive backdrop for the UK economy in the years ahead.
And relative to other economies around the world, the UK economy has performed quite well in recent years, with the consumer as the engine of growth. Recently, consumers appear to be using more borrowing to support spending, such that household debt as a proportion of income is starting to edge up again.
UK growth disappointing, but no disaster
But now there appears to be a shift underway. With a weaker pound pushing up prices, inflation is set to outpace wage growth, while employment growth is set to slow as the unemployment rate in the UK is already among the lowest in the EU. The next couple of years may therefore see a weakening of growth and higher inflation, before reverting to growth of around 2% a year.
The downside risks to this forecast come from a negative fallout from the Brexit negotiations. Andrew is now an advisor to PwC, and in their view the main economic consequences of Brexit are the short-term uncertainty which discourages investment, and the disruption to trade, though this will depend on the nature of the ultimate agreement.
Before the vote, the impact was expected to be a 3% reduction in the level of economic output by 2020 relative to continued EU membership, but the strong performance of the UK economy in the second half of 2016 means this has moderated to an estimated impact of 2.4%.
Interest rates set to rise
The robust global economy means that the interest rate cycle is beginning to turn, with US interest rates now on a gradually rising trajectory. Andrew remarked that he is known for favouring higher rates, and believes the MPC should have started to raise the Bank Rate already in recent years. He now thinks the MPC should start to gradually raise rates, and that a reasonable expectation is that rates will reach 2-3% by the early 2020s, lower than the pre-crisis norm.