— MPC Member Broadbent suggests inflation has fallen by less than feared
By Laurie Laird
LONDON (MaceNews) – The UK economic contraction may have been exaggerated by the statistical measurement of public services, according to a Bank of England official, who also downplayed sustained below-target inflation in Britain.
“Part of the drop in GDP reflects an unusually large decline in the measured real output of public services, something that has no consequences for people’s incomes or their ability to spend,” said Ben Broadbent, a member of the Bank’s Monetary Policy Committee, at a webinar on Tuesday. “Taken together, measured declines in measured health and education output accounted for a quarter of the near-9% drop in aggregate GDP during the course” of 2020.
On headline measures, the UK economic has contracted more dramatically than developed world nations and recovered at a slower pace in the autumn. At the end of the third quarter, UK output remained 8.6% below late 2019 levels, compared to 3.5% for the U.S. and 4.4% for the euro zone.
Unlike during other periods of economic weakness, consumer spending on goods has remained robust during the Covid downturn. “GDP growth may have been the weakest on record but retail spending growth is just about the strongest,” said Broadbent. Retail sales were 2.6% above February levels in November, despite a sharp fall in the penultimate month of the year, as the UK endured a national economic lockdown.
Spending was sustained by government-sponsored furlough schemes, with outlays on consumer services, such as restaurants and cinema visits, remaining weak, he added.
With much of the country facing economic restrictions from mid-December, ahead of a third national lockdown announced at the start of the year, output is likely to contract in the final quarter of 2020 and the opening three months of this year, said Broadbent. GDP at the end of last year was “around” 10% lower than at the end of 2019, the “sharpest calendar year decline since at least 1920.”
That could push unemployment to “almost 8%,” from the current level of just under 5%, which should continue to keep inflation in check, with labour market slack still the best predictor of inflationary pressures, said Broadband. But the MPC member seemed relaxed about persistently low inflation in the U.K.; the headline consumer price index has hovered below the Bank’s 2.0% target for the past 16 months. But core inflation, which strips out food and energy, has fallen by much less than expected, Broadband noted.
In a speech on negative interest rates on Monday, fellow MPC member Silvana Tenreyro noted that “disinflationary pressures predated Covid,” with core inflation failing to reach the target rate for “80% of the past seven years.” Broadbent did not comment on interest rates in Tuesday’s address.