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.

South West Agency

The broader outlook - slow growth, below trend

GDP projection based on market interest rate expectations and £375

billion asset purchases

South West Agency

Demand

South West Agency

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

Sources: Office for Budget Responsibility and ONS.

South West Agency

A gradual lessening in the pressure on household

budgets Real household consumption and income(a)

South West Agency

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

South West Agency

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

Sources: NMG Consulting and Bank calculations.

South West Agency

World economic growth has slowed… World trade and UK exports

Sources: OECD and ONS.

South West Agency

…and UK income from foreign investments has

fallen UK current account

Source:

South West Agency

Investment within the UK remains weak Investment(a)

South West Agency

Supply

South West Agency

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

South West Agency

…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.

South West Agency

…which is very puzzling! Private sector output and employment

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

South West Agency

Private sector unit labour costs(a)

Sources: ONS and Bank calculations.

South West Agency

Private sector labour productivity(a)

South West Agency

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

Sources: Bureau van Dijk and Bank calculations.

South West Agency

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

making companies

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

South West Agency

Money and credit

South West Agency

Cumulative net corporate bond issuance by

private non-financial corporations over calendar years(a)

Source:

South West Agency

Supply or demand? Loans to PNFCs and households

South West Agency

• 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

South West Agency

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.

South West Agency

…which is improving credit supply to the real

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

South West Agency

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

Sources: Bank of England and Bloomberg.

South West Agency

Inflation

South West Agency

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

and £375 billion asset purchases

South West Agency

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.

South West Agency

Inflation and households’ inflation perceptions and expectations one year

ahead

Sources: Bank of England, GfK NOP and ONS.

South West Agency

Averages of other forecasters’ central projections(a)

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

South West Agency

Projection of the level of GDP based on market interest rate

expectations and £375 billion asset purchases

South West Agency

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.

South West Agency

Conditioning path for Bank Rate implied by forward market interest

rates(a)

South West Agency

Sectoral broad money(a)

South West Agency

Survey indicators of capacity utilisation by sector(a)

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