Britain has a chance to prevent the recession after the referendum, however, its economy is suffering. The situation is almost the same in all more or less developed economies, and the main source of support policymakers used to help is fully empty. The further easing of the monetary policy of the country would be all but counterproductive. The government of Theresa May needs to get more loans now and focus on the easing of the fiscal policy.
According to Kristin Forbes, a member of the monetary policy committee of the Bank of England, the drop in the Bank’s interest rates down to 0.25% is quite sufficient. She gave an optimistic point of view in her latest message, saying the economy is flexible and will be able to sustain this tough situation after the Brexit vote. She stood against her colleagues from the committee in denying support to the further quantitative easing.
Mark Carney, governor of the Bank of England, has acted impeccably to support the economy in the wake of the Brexit vote. It’s one of the ironies that Brexit campaigners have sharply criticised him even though he’s an important reason that the economy seems to have withstood an immediate demand shock. Making extra liquidity available to the banks and reducing still further the cost of borrowing is exactly what a central bank should be doing right now.
My worry is that, if there is a downturn, monetary measures cannot do anything more to arrest it. I did a Newsnight debate recently with Douglas Carswell, the Ukip MP, in which I defended the cast of policy in the advanced economies. Mr Carswell countered with one point on which he is correct and that’s worrying. Very loose monetary policy has had perverse distributional effects. It’s boosted asset prices (not least the London property market) but done little to support the living standards of those dependent on incomes. Indeed, average real wages declined by about 10 per cent from 2007 to 2015.
In short, people who own financial assets and property have done very well from unorthodox policies, while others have suffered a squeeze on living standards. And because wealthy people have a higher propensity to save (they already have what they want), it’s not an especially direct tool of demand management. Annual inflation (at 0.6 per cent) is still well below target but is likely to pick up owing to the effect on import prices of the post-referendum depreciation of sterling. We’re likely to see, in that case, still greater pressure on real incomes.
It doesn’t look good. Britain has a stubborn problem of weak productivity and stagnant or declining real incomes, even while asset prices have been booming. The government should make a virtue of necessity by taking advantage of negative real interest rates. It can borrow at an unprecedentedly low cost of capital in order to fund infrastructure, and it should do so.
Britain is in an unusual economic state. Having relied on monetary activism, policymakers now have both the opportunity and the need to borrow and spend in order to support demand. Because the Bank of England has credibility in financial markets, there’s no serious risk of losing market confidence.
But this isn’t nirvana. Far from it. In the referendum campaign, George Osborne unwisely warned that a Brexit vote would require an immediate emergency budget to cut spending. Not so, but if, as almost all economists believe, Brexit does have a negative effect on Britain’s long-term growth, then that will constrain the ability of the government to spend later on. The response we’ve heard, by contrast, from the Labour party conference this week is to wish away such constraints. That, of course, is no solution whatsoever to Britain’s present economic weaknesses.