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Ignore ‘Chicken Licken’ pessimists, says Bank of England chief economist

Haldane - Jason Alden/Bloomberg
Haldane - Jason Alden/Bloomberg

Excessive pessimism over the state of the economy risks undermining the recovery and making a tough situation worse, the Bank of England’s chief economist has warned.

Andy Haldane compared gloomy forecasters to “Chicken Licken”, citing the folktale of the chicken who believes the “sky is falling” after an acorn falls on its head, and said they risked dragging down the economy even as the recovery was powering ahead.

His warnings came as official figures showed households put aside record savings during the pandemic lockdown, paying down debts and boosting bank balances to set the scene for a strong rebound when they want to get back to spending.

The savings ratio surged to a record high of 29.1pc in the second quarter of the year, the Office for National Statistics said, as families were unable to spend as much as usual but still had salaries and wages from jobs and furlough payments, so held on to close to one-third of their incomes.

It means typically high-spending Britons saved more than the traditionally more parsimonious Germans, with the longer UK lockdown blocking spending.

By August households had paid down more than £17bn of consumer credit debts and built up more than £80bn of deposits in bank accounts, according to the Bank of England.

By contrast in the same period of 2019 families saved around £25bn and borrowed close to £5bn.

This extra boost of almost £98bn to personal finances equates to more than £3,500 on average for each of the UK's 27.8m households, laying the ground for higher spending in the rest of the year.

Martin Beck at Oxford Economics expects consumers to spend much of the gain, even if the savings ratio stays a little above its usual level of between 5pc and 10pc for some time.

“People did not consciously choose to save this money, it was forced on them. The evidence suggests windfall gains are usually spent,” he said.

Retail sales are already back above their pre-pandemic levels, and Mr Haldane estimates that overall consumer spending has fully recovered too.

“As best we can tell, consumer spending now stands at around pre-Covid levels. In other words, consumption has fully recovered more than a year earlier than the Bank expected as recently as August. Large-ticket purchases, such as cars and houses, are also back to around pre-Covid levels,” Mr Haldane said.

Economic downturn: How latest restrictions will impact on growth
Economic downturn: How latest restrictions will impact on growth

He now thinks the economy will have recovered 90pc of its losses by the end of October, leaving GDP between 3pc and 4pc lower than it was before the pandemic struck.

The economy shrank a touch less than previously realised in the second quarter, the ONS said, with a fall of 19.8pc, rather than the 20.4pc initially estimated.

Mr Haldane warned that a key risk to further growth is excessive pessimism, which could encourage households to cut spending, and businesses to limit hiring and investment.

“Collective anxiety is as contagious, and could be as damaging to our well-being, as this terrible disease,” he said in a speech to businesses in the north west of England.

Encouraging news about the present needs not to be drowned out by fears for the future. Now is not the time for the economics of Chicken Licken.”