inflation and the economy an off-the-record...

Inflation and the Economy

An off-the-record presentation

December 2012

Geoff Harding

Deputy Agent

Bank of England Agency for the South West

South West Agency

The official GDP data will continue to bounce up and

down Bank staff estimates of the contributions of special events to quarterly

growth in manufacturing and services output

Sources: ONS and Bank calculations.

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The broader outlook - slow growth, below trend

GDP projection based on market interest rate expectations and £375

billion asset purchases

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Demand

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Borrowing increases, but at a reducing rate Public sector net borrowing

Sources: Office for Budget Responsibility and ONS.

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A gradual lessening in the pressure on household

budgets Real household consumption and income(a)

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But households continue to save and to pay off debt Household saving ratio(a)

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Reasons for expected increase in monthly saving over the next year(a)

Sources: NMG Consulting and Bank calculations.

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World economic growth has slowed… World trade and UK exports

Sources: OECD and ONS.

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…and UK income from foreign investments has

fallen UK current account

Source:

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Investment within the UK remains weak Investment(a)

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Supply

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Growth in output remains weak… GDP and sectoral output(a)

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…but we have seen strong growth in private

employment… Cumulative changes in private sector employment since 2010 Q2(a)

Sources: Labour Force Survey and Bank calculations.

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…which is very puzzling! Private sector output and employment

Sources: ONS (including the Labour Force Survey) and Bank calculations.

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Private sector unit labour costs(a)

Sources: ONS and Bank calculations.

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Private sector labour productivity(a)

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Estimates of output per employee by size of business(a)

Sources: Bureau van Dijk and Bank calculations.

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Company liquidations in England and Wales and an estimate of loss-

making companies

Sources: Bureau van Dijk, The Insolvency Service and Bank calculations.

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Money and credit

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Cumulative net corporate bond issuance by

private non-financial corporations over calendar years(a)

Source:

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Supply or demand? Loans to PNFCs and households

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• Launched July, joint scheme with the Treasury

• Boosts net lending to the real economy – firms and households

• Lowers the cost of finance for banks/building societies

• Set-up period through till January 2014

• 4-year funding to banks at below current market rates

• Participating banks/building societies can borrow up to 5% of their

stock of lending to the real economy as at end June 2012 (£80 bn if

all banks participate)

• 30 participants so far = 80% of stock of lending to UK real economy

Funding for Lending scheme

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Sharp falls in banks’ funding costs since the

summer… UK banks’ indicative longer-term funding spreads

Sources: Bank of England, Bloomberg, Markit Group Limited and Bank calculations.

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…which is improving credit supply to the real

economy Credit Conditions Survey: changes in credit availability(a)

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Whither Bank Rate? Bank Rate and forward market interest rates(a)

Sources: Bank of England and Bloomberg.

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Inflation

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Staying above target for a little longer CPI inflation projection based on market interest rate expectations

and £375 billion asset purchases

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We face the rather unappealing combination of a subdued recovery

with inflation remaining above target for a while. An unfavourable

external environment continues to shape our prospects.

The immediate economic outlook remains a challenging one. Growth

is likely to remain sluggish and inflation above target. The road to

recovery will be long and winding. But there are good reasons to

suppose that we are travelling in the right direction.

Inflation and the Economy

An off-the-record presentation

December 2012

Geoff Harding

Deputy Agent

Bank of England Agency for the South West

South West Agency

Sterling food prices

Sources: Bank of England, ONS, S&P indices, Thomson Reuters Datastream and Bank

calculations.

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Inflation and households’ inflation perceptions and expectations one year

ahead

Sources: Bank of England, GfK NOP and ONS.

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Averages of other forecasters’ central projections(a)

Source: Projections of outside forecasters as of 1 November 2012.

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Projection of the level of GDP based on market interest rate

expectations and £375 billion asset purchases

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Likely to remain above target for the first part of the forecast period

Higher than in August – reflects recent outturns & announcement of large

increases in household energy prices.

Further declines in inflation checked by price increases in sectors where market

influences are weak – student tuition fees, domestic gas and electricity prices

are rising faster than wholesale energy prices.

Such factors are pushing up inflation by over 1 percentage point a year, and the

rate of inflation in those sectors influenced more by market pressures would

have to be unusually low for inflation overall to be close to the 2% target.

The Committee judges that inflation is likely to fall back in the second half of

next year, as the impact of short-term pressures wears off and slack bears down

on pay growth.

Towards the second half of the forecast period, the risks to inflation are broadly

balanced around the target.

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Conditioning path for Bank Rate implied by forward market interest

rates(a)

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Sectoral broad money(a)

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Survey indicators of capacity utilisation by sector(a)

Sources: Bank of England, BCC, CBI, CBI/PwC and ONS.