Carney talks up growth policies

Chief Market Strategist, Cantor Index

LAST week’s desperately disappointing GDP data has attracted comment and consternation from government supporters and critics alike. The fact that GDP fell by 0.3 per cent in the last quarter of 2012 tells us that the UK economy flat-lined over the year. Clearly, the recovery process is teetering on the vortex of the abyss, and the threat of a triple-dip recession is now staring us in the face. Nothing new about that statement you might say.

However, this dire data coincides with positive news on employment. It also sits next to comments attributed to Mark Carney, the governor-elect of the Bank of England at the World Economic Forum in Davos, which may signal changes in monetary, and perhaps fiscal policy, which could be positive for growth.

In recent years, the labour market has been more buoyant than it deserves to be, considering the fragility of the economy. There are far more people in work in the UK than seems justified. The question that must be asked is how long this gravity-defying feat can be maintained. There is little doubt that unemployment would be higher if banks had not been more compassionate and lenient – hence bankruptcies are lower than they would have been.

The fact that sterling is about 25 per cent lower in value than it was five years ago may also have helped British exports. Further, experience tells us that the ability to rehire the same quality of employee is often tricky – thus fewer people will have been made redundant than might have been the case, given an assumption that growth will return at some point.

Over the years, growth figures are also highly suspect and subject to revision. There is no doubt that the contribution made by the financial sector to growth in the first seven years of the last decade was clearly greatly exaggerated. Since the 2008 financial crisis, we have had a reality check.

In Davos, Carney spoke of perhaps being more flexible about inflation targets, with a view to allowing growth to be given every chance. This thinking is not wholly different from that of the existing Bank of England management. But clearly employment data and growth will have greater influence on fiscal and monetary policy. Carney also appears to be insistent that changes to banking regulation, and regulation of hedge funds and peripheral financial markets, must be implemented in the next two years to avoid another crisis and irrational talk of too-big-to-fail. Most interestingly, it is understood that financial transgressors will be named and shamed.