© Robert Wood
|
The U.K is not yet on a sustainable path to recovery. It is true that growth is returning, with annualized GDP rising 0.3% in the first quarter, and is likely to be at least as good in Q2 and perhaps in Q3 as well. Thus, we are definitely seeing expansion, but so far it is driven by loose monetary policy, low interest rates and households saving less or in the other words spending money that they do not have. Hence, at the minute the path is not sustainable, but it is growth nonetheless, which is a big and positive change from the previous 18 months, and that could develop to a more sustainable expansion.
The IMF forecasts for Britain now stand head and shoulders above its major European peers. Do you expect that the U.K. might be the first European country, which will overcome the fallout of the financial crisis?
I think the U.K is still away from its pre-crisis position, with output is still being 4% below where it was in 2007, which is not that different from some Eurozone countries. However, it is way behind Germany, for instance, which has been doing a lot better than that. Therefore, we expect the U.K. to grow faster than the Eurozone as a whole over the next couple of years, but it still has a long way to go before it gets back to something like normality.
Recently we have seen that members of MPC voted unanimously against more QE. Does it mean that we might see a tapering of asset purchases in the near future?
No, absolutely not. The BOE voted unanimously against adding to the amount of the asset purchases that they have. However, they are nowhere near reducing the outstanding amount of asset purchases or implementing any sort of tightening of monetary policy. What the minutes pointed to was that the interest rates will remain unchanged around the current level of 0.5% for the foreseeable future throughout late 2015-2016 to ensure the recovery continues. Even then the BOE last forecasts expect growth to reach only about 2% a year, way below the rates the U.K had seen before the financial crisis. Hence, I do not think there is any possibility of reduction in the QE.
Moreover, the U.K is a bit in a different position from the U.S., where the Fed is currently adding extra asset purchases every month and is talking about adding a slightly smaller amount every month. The U.K at the moment is not buying any assets, thus tapering would mean cutting back on the outstanding amount of asset purchases, which is extremely unlikely in the near term.
What main risks do you see for the U.K.'s economy in the foreseeable future?
The biggest risk for the U.K is households' incomes, which are rising much less rapidly than consumer prices. Household incomes are inching up between 1-2% a year, while consumer prices are going up about 3%. In other words, their spending power is being heavily squeezed. The recovery right now depends on those households being encouraged to keep spending even though their incomes are not growing up so fast until the point, where we start to see some wage growth. Therefore, in the very near term that is the biggest downside risk for the U.K., since falling household spending power may lead to a much weaker consumption.