Britain faces ‘hard yards’ ahead as the economy’s recovery from the pandemic stalls, the Governor of the Bank of England warned last night.
In a downbeat speech Andrew Bailey cautioned that interest rates will have to rise to tame escalating prices – but stressed the economy is currently too weak to withstand such a move.
He said so many problems have reared their heads over the last few months that he was tempted to ask, ‘And when are the locusts due to arrive?’ in a reference to the Biblical plagues of Egypt.
Mr Bailey argued Covid might have amplified the impact of other shocks, adding jokingly: ‘Either that or the gods really are against us.’
In a downbeat speech last night, Andrew Bailey (pictured) said so many problems have reared their heads over the last few months that he was tempted to ask: When’s the plague of locusts?
Inflation, or a rise in the cost of living, has been running away from the Bank’s target of 2 per cent recently as staffing shortages, supply chain blockages and red-hot energy prices have combined with soaring demand since lockdown ended.
The Bank conceded last week that inflation could rise above 4 per cent by the end of the year, potentially adding hundreds of pounds on to household bills and shopping baskets.
Economists had been relying on a strong economic recovery, lifting wages and getting unemployed workers back into jobs, to help balance rising prices.
But at the annual dinner of the Society of Professional Economists, Mr Bailey said: ‘The recovery has slowed and the economy has been buffeted by additional shocks.’ He said the switch from spending on goods, when people were locked down, to going out and splashing cash on restaurants and other experiences ‘has not taken place to date on the scale expected’.
He added: ‘Meanwhile, supply bottlenecks and labour shortages have weighed on output, and are continuing. Indeed the number of high profile supply bottlenecks appears to be increasing. I must say that when I heard that we were suffering a shortage of wind to generate power I was tempted to ask, “And when are the locusts due to arrive?”’
The Bank (pictured) conceded last week that inflation could rise above 4 per cent by the end of the year, potentially adding hundreds of pounds on to household bills and shopping baskets
A slew of recent issues have added to inflation and damaged economic output. A shortage of staff – due to some on furlough, or being inadequately trained for in-demand roles such as lorry drivers – has meant some firms are having to spend much more on recruitment. And a jump in demand for a range of materials, from high-tech semiconductor chips to steel as manufacturing activity has resumed, has pushed up prices.
Supply shortages and shipping chaos has also caused energy and fuel prices to soar. Mr Bailey said: ‘A number of these supply bottlenecks are not obviously a product of Covid, though others are. It is also possible that the economic fragility created by Covid has amplified the impact of other shocks – either that or the gods really are against us. I think it is more likely Covid amplifying at work.’
He confirmed that over the ‘medium-term’, interest rates will have to rise to tame inflation.
The Bank cut its base rate to 0.1 per cent last year. While reversing this could help to control rising prices, economists are worried it may put the brakes on recovery.
The Governor said many factors adding to higher prices would be ‘transitory’. But in a gloomy warning, he said: ‘The recovery is weakening. A lot therefore turns on how effectively supply capacity is rebuilt and over what time, and how the labour market evolves. These are truly hard yards.’
An alarm call in perilous times
Commentary by Alex Brummer, City Editor
Andrew Bailey is not known for his colourful flourishes – although he did once stare down a grizzly bear at his family’s Idaho retreat.
When the normally taciturn Governor of the Bank of England wonders out loud, before an audience of senior economists, ‘when are the locusts due to arrive’ one has to be worried.
The Bank had hoped that with much of the country vaccinated and official interest rates held at the record low level of 0.1 per cent, output would be racing back to pre-pandemic levels.
When the normally taciturn Governor of the Bank of England wonders out loud, before an audience of senior economists, ‘when are the locusts due to arrive’ one has to be worried
But it is not happening like that. As Bailey observes, the ‘hard yards’ are yet to come. Much economic growth has been delayed. In spite of a boom in eating out, as the public relaxes after Covid-19, there has been huge unexpected disruption.
The energy crisis is one issue. But supply chains are at breaking point in everything from timber and steel to the semiconductors that are vital to modern cars. This has caused construction and manufacturing to pause.
The message from the Bank’s own agents, who take the temperature of the regional economy, is that these bottlenecks are getting worse.
They are weighing heavily on economic expansion. And with the shortage of wind to generate power, Bailey also is starting to think that the gods are against us. The Bank now fears that its hopes of output returning to pre-pandemic levels anytime soon will be postponed.
The energy crisis is one issue. But supply chains are at breaking point in everything. The message from the Bank’s own agents, who take the temperature of the regional economy, is that these bottlenecks are getting worse. Pictured: Out of use signs in fuel pumps, Sept 2021
As if this were not enough, Bailey and his fellow interest-rate setters on Threadneedle Street have other puzzles to confront.
The jobs market is at an inflexion point with the 1.7million estimated to be on furlough in July expected to swim or sink when they come off the scheme at the end of this week. This is at a time when job vacancies stand at a record level of one million.
With so many moving parts, including the shortage of vital logistics and HGV drivers, it is all but impossible to know what the underlying picture in the labour market is and how best to set policy to avoid unemployment surging.
We live in perilous times and Bailey, who is not heard that often, is sounding the alarm. Such uncertainties are not the ideal backdrop for Chancellor Rishi Sunak’s (pictured) budget and multi-year spending review set for next month
The other big problem is deciding whether the Bank’s forecast of 4 per cent plus inflation for this year (twice the official target of 2 per cent) is transient – as has largely been its position until now – or more persistent.
With energy prices surging and competition for skilled labour exploding, it looks increasingly as if the public is expecting more inflation – which will drive higher prices. If so, the Bank will have to respond – and that will mean raising interest rates earlier than Bailey would like.
A stuttering recovery could be badly damaged or even reversed by an interest rate hike even from the present low levels.
We live in perilous times and Bailey, who is not heard that often, is sounding the alarm. Such uncertainties are not the ideal backdrop for Chancellor Rishi Sunak’s budget and multi-year spending review set for next month.