UK Economy Update: What Mervyn Said

Mervyn King made some important statements on the health of the UK economy at his quarterly press conference today. I have summarised some of them below and added a free deck of twelve charts as a resource download showing updated UK macroeconomic data for teachers who might want to refresh some of the latest economic developments in their revision sessions. There are some really useful context quotes in here from the Governor.

Mervyn King on the UK economy

Re-balancing the UK - “No doubt that “we are facing a difficult time ahead with a slow and prolonged adjustment”...“fiscal consolidation is reducing growth, but says that net exports should pick up in 2011-12”.... “The rebalancing of the UK economy which implies slow growth in consumer spending and in public spending will take not just one year but several years, and the switch to business investment and net exports will also take several years”

Squeeze on consumers - “We’ve forecast slow growth in consumer spending due to the continued squeeze in real incomes”

QE becomes QT? -“Quantitative tightening will only start when the Bank are confident they want to tighten monetary policy over a significant period….The credit crunch was about the willingness and ability of the lending system to lend to the rest of the economy. It is clear that lending to the business sector is still falling.”

Boosting industry - “If we re-balance the economy towards manufacturing that might boost the growth rate of productivity in the UK”

Growth - Recession and possible hysteresis effects - “no reason to suppose long run real GDP potential growth rate has changed”

Setting interest rates - “Monetary Policy shouldn’t respond to short term external shocks. No bias one way or the other on interest rate movements”

Absence of wage inflation in the UK - wage growth is occurring at levels well below those that would be a concern to the inflation target.”

Inflation - “Allowing for the effect of volatile global commodity prices, domestic UK inflation is around zero”.....“What we are faced with is a dilemma in which the domestically generated contribution to inflation is well below the target and the contribution of the other factors is well above and keeps pushing it up.”

Credit crunch 2.0? - “it is clear that lending to business sector are still falling. Commercial banks need to refinance (i.e. build up their capital base) before lending can increase”

The inflation target - “inflation remains volatile - the MPC must focus on medium term. But outlook for growth and inflation is unusually uncertain.”....“risk that high inflation will increase expectations and put pressure on wage and price setting”

My thanks to the economics team at the EEF for their tweeting of key points from the BoE Inflation Report Press Conference

Download the UK economy charts
UK_Economy_Update_May_2011.pptx