Economic Analysis: Nasty surprises for economy take shine off Bank of England’s Super Thursday

Russell Lynch
Bank of England Governor Mark Carney has the unenviable job of presenting growth and inflation both heading in the wrong direction: Paul Dallimore

Sky's “Super Sunday” football is a bigger draw with the average punter than the Bank of England’s “Super Thursday” — but Threadneedle Street might be supplying a few unwanted thrills and spills of its own next week.

The central bank’s once-a-quarter dumping of its latest rate decision, meeting minutes and economic forecasts on the financial markets has earned the tongue-in-cheek moniker from eco-wonks. But judging by the likely contents, the occasion could need a new name. Super Thursday is likely to be anything but “super”— there’s some bad news on the way.

Bank Governor Mark Carney set his stall out in February with a chunky upgrade to the UK’s forecast growth this year — from 1.4% to 2% — to reflect the economy’s surprise post-referendum strength.

The Chancellor loosened the fiscal corset in November, the global economy looked firm, credit was plentiful and there were “few signs” of any inclination of British consumers to rein in spending. So far, so good.

But how times change. Threadneedle Street predicted a quarter of 0.5% growth between January and March, and instead we’ve got a much less clever-looking 0.3%. Sceptics will say a big growth upgrade from the Bank was probably the ultimate sell signal given its forecasting track record over the years; but nonetheless the chances are Carney might have to rein in some of its bullishness three months on.

You don’t have to look far for the culprit. Inflation has also been coming back strongly thanks to the weaker pound since the Brexit vote, averaging nearly 2.2% in the first quarter of 2017. That’s ahead of the Bank’s previous assumptions, which also have it peaking at 2.8% in early 2018.

Michael Saunders, one of the monetary policy committee’s more hawkish members, meanwhile, says he “wouldn’t be surprised” if inflation heads to 3% by then.

While wages are still sluggish, energy bills have been rising more sharply than the Bank assumed, squeezing shoppers’ wallets and feeding into those dire retail sales figures we saw for March. Even if the MPC takes a more emollient view due to the pound’s slight rise since February and lower oil prices, the inflation picture has hardly improved.

Awkwardly the prevalence of nasty surprises, seen more broadly lately in the UK data despite this week’s more positive purchasing manager surveys, contrasts sharply with the signals coming from our European cousins.

The eurozone is showing a clean pair of heels to Brexit Britain after 0.5% growth between January and March, helping the single currency bloc spring ahead of us in Nomura’s ‘surprise index’ (despite a limp performance from the eurozone’s second-biggest economy, France). Nomura’s measure (above) of how well economic data perform against economists’ forecasts — exactly in line with expectation being zero shows the UK clearly exceeding hopes last year after the vote; but now the data is falling off a cliff. Contrast that with the eurozone, which has been punching the lights out lately.

Carney’s counterpart at the European Central Bank, Mario Draghi, has his foot on the monetary gas, investment is soaring and confidence is high in a region that many thought could collapse not so long ago.

Unemployment is still high in the EU — at 9.5%, double the UK rate — although that potentially gives the region more slack to produce above-trend growth. One economist even christened the eurozone the world’s “Cinderella” economy this year. But if Europe is Cinders, then that makes the UK one of the ugly sisters.

The good news in all of this — for mortgage-payers at least — is that there’s less chance of interest rates going up, as the hands of the MPC’s hawks are stayed by the weaker growth figures. But Carney has the unenviable job of presenting growth and inflation both heading in the wrong direction, against the backdrop of a general election campaign, as well as some incendiary leaks from Downing Street Brexit dinners, while the economy is outshone by our closest neighbours.

One careless slip and the Canadian will find himself in the “Enemy of the People” stocks. Politics aside, more worrying still is the possibility that what we’ve seen in the first three months of this year is the beginning of a trend: the first inklings of Brexit grinding down the economy’s growth potential. We might have to get used to a few more “Mediocre Thursdays” from now on.

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