Bailey, who gave a speech to the Society of Professional Economists at a dinner yesterday evening (27 September), described the UK’s current stage of recovery as “the hard yards”, with the rate of recovery slowing over recent months and expected to remain sluggish until the “recovery nears its end point”.
“Milton Friedman and Anna Schwartz wrote in their monetary history of the US that the most notable feature of the revival of the US economy after 1933 was not its rapidity but its completeness,” he said.
“I, and other MPC members, have used the analogy of a bridge to describe the role of economic policy in the age of Covid, the bridge to the other side of Covid. We are still on that bridge.”
Bailey added that, relative to Q4 in 2019, the level of GDP to the end of July is 3.5% lower – “one percentage point below the level consistent with the August Monetary Policy Report”.
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“There is a crucial distinction between growth rates and levels of activity,” he continued. “It is inevitable in a bounce-back that the growth rate will slow as the recovery nears its end-point.
“It is not though inevitable – or desirable – that the previous level is not regained.”
The Bank of England governor pointed to a delay in the recovery of some consumer-facing sectors, with supply bottlenecks causing disruption and leading to a fall in construction output.
He also said labour shortages – combined with these bottlenecks – have created additional economic shocks for the UK, with high-profile squeezed supply chains only continuing to increase.
“I must say that when I heard that we were suffering a shortage of wind to generate power, I was tempted to ask, ‘when are the locusts going to arrive’,” he added.
However, he believes Covid has amplified these bottlenecks in the system, although warned the current labour market remains “a big puzzle”, given that 1.7 million jobs have been covered by the UK Government’s furlough scheme which is due to end this week.
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“The number of people unemployed in the three months to July was 186,000 higher than immediately pre-Covid, and the number of inactive people was 634,000 higher,” Bailey warned.
“It is possible to reconcile these numbers, but to do so involves a lot of movement of people from furlough, unemployment and inactivity, in ways not so far seen.”
Amid a range of potential outcomes for the UK labour market, the BoE Governor said they will all have different impacts on growth, inflation and therefore monetary policy, with the bank having had to rely on asset purchases “to do a lot of the work” due to the “proximity of interest rates to the lower bound”.
“For most members of the MPC, the outlook for the labour market is highly uncertain and to some degree likely to be resolved in fairly short order, and this justified a wait-and-see approach on policy in view of the continuing belief that higher inflation will be temporary,” he explained.
“Within this view, some members put more emphasis on the continuing shortfall in the level of GDP relative to pre-Covid, while others emphasised the continuing direction of travel towards closing that gap and the evidence of cost pressures accompanying the closing.
“But all of this group were of the view that the stimulus to monetary policy enacted in response to Covid would need to start to unwind at some point, that unwind should be enacted by an increase in bank rate, and if appropriate would not need to wait for the end of the current asset purchase programme.”