George Buckley at the Millfield Economics Society

Millfield’s Economics Society was privileged recently to welcome George Buckley, Deutsche Bank’s Chief UK economist, to the school to deliver a lecture on the current state of the UK economy. Laura Dearman reports on his talk and the issues raised in discussion.

Dr Buckley focused on the government’s economic objectives of economic growth and inflation and went on to explain some of the policies that the coalition government and the Bank of England are currently undertaking to achieve these objectives: Fiscal and Monetary Policy.

Buckley answered commonly asked questions such as ‘Are we in a double-dip recession?’ and ‘Is this recession worse than the Great Depression?’ In his talk, Buckley suggested that global growth over the next 5 years is likely to outpace the pre-recession average but with emerging economies even more dominant than before (notably China, Brazil, India and Russia) contributing most significantly to global GDP increases.

However in comparison to previous recessions the UK still remains around 4% below its pre-recession GDP level, suggesting that this recession is in fact worse than the Great Depression.

Dr. Buckley proposed many reasons for this apparent slow recovery and below average growth rates. Firstly, consumer spending still remains very weak with household incomes falling in real terms and the savings ratio increasing year on year. Household spending on durable goods had been hit particularly hard. With consumption totalling 64% of GDP, weak consumer spending is likely to continue to depress the UK’s growth rate.

It seems as though growth is likely to remain weak with the UK being heavily dependent on the Euro area which accounts for almost half of all UK goods exports. George Buckley also showed the effect the growing correlation between the UK and US economic growth is likely to have on the UK economy. He suggested that this growing correlation between the UK and US economies together with the high dependence that the UK has on the EU countries for exporting it goods will act as a drag on GDP growth as the UK tries to recover.

Mr Buckley went on to ask the question ‘Why has the Bank of England’s inflation forecasts been consistently low?’ There are many possible explanations for this and it is important to recognise the causes of inflation to answer this question. Mr Buckley suggested that high levels of inflation in the past were likely to have the impact of increasing future inflation levels. This is because, with higher inflation comes the expectations of workers that prices will continue to rise, without a consequent rise on wages. Therefore workers are likely to bargain higher wages from employers, forcing costs up and possibly leading to higher prices.

George Buckley also suggested that the fall in the value of the pound has also had this effect on UK price levels, with imports becoming increasingly expensive. To add to this the UK’s inflation rate has likely been affected by rising commodity prices, which consequently have the effect of raising costs for producers, and also the impact of the coalition’s VAT rise.

Dr. Buckley suggested that these cost-push causes of inflation were not as highly considered within the Bank of England forecasts, whereas the demand-pull causes were more predictable so featured more heavily within the Bank’s fan charts. Since there has been very weak consumer demand, demand-pull inflation is unlikely to have caused the higher levels of inflation than originally thought. Thus Bank of England low forecasts are likely to be caused cost-push inflation being under-estimated, with external forces having larger effects on inflation than would normally be the case.

Dr Buckley interestingly proposed that fiscal austerity may not be such a bad thing. He states that in past recessions deficit cuts have not produced weaker economic growth, and puts forward the argument for lower spending as opposed to higher taxation; arguing that the economy performs better when adjustments are made through spending and not taxation. In his presentation it was also shown that markets have been encouraged by the UK’s austerity plans.

Finally, he also spoke of the monetary policy of quantitative easing that is open to much criticism and applause. Dr Buckley believes that QE had been relatively successful in that it added 1.5-2% to GDP at the expense of just 0.75-1.5% to inflation. However it is hard to know what would have happened had the UK not undertaken QE. There is also no way of comparing its success as it has not been undertaken prior to the 2008 banking crisis therefore no precedent exists against which to compare its recent effects. Dr. Buckley suggested that there are not many plausible alternatives to QE.

Dr. George Buckley’s presentation ‘UK Economics: Worse than the Great Depression’ proved to be a very interesting, engaging and thought-provoking talk, focusing on areas of the UK economy that are extremely relevant to today’s economic climate. To have someone of this calibre provide his opinion on the UK economy has proved to be beneficial to the Department of Economics and its students.