Charlie Bean has warned that UK economic growth will slow in the coming months, as consumers face a “Wile E. Coyote” moment, having continued to spend while wages have fallen.
Sir Charlie, a former deputy governor of the Bank of England who now produces the UK government’s official macroeconomic forecasts at the Office for Budget Responsibility, said on Wednesday that British households were realising their incomes had started to fall and would rein in their spending, potentially leading to “quite a sharp slowdown”.
Investment and export demand are unlikely to grow strongly enough to offset a slowdown in consumer spending, he added.
Speaking at a monetary policy forum organised by Fathom Consulting in London, Sir Charlie said “reasonably modest changes in household spending have big effects”, but added that the Brexit negotiations would be an important determinant of how severe the slowdown would be.
“If it’s smooth and orderly, that will help to support spending,” he said. “But if it’s disorderly, that could have adverse effects on consumer confidence.”
In a reference to the slapstick Looney Tunes character who repeatedly fails to catch the Road Runner, he said consumers are facing a “Wile E. Coyote” moment.
“Eventually they will realise [that their incomes have not continued growing] . . . the crucial question is can other elements of spending [investment and net exports] take up the slack?”
Sir Charlie also said both investment and exports were unlikely to grow strongly while businesses were still uncertain about the UK’s future trading relationship with the EU and other countries.
The latest official forecasts from OBR were published in March, before any official figures for quarterly growth in economic output in 2017. At the time, the OBR forecast the UK economy would grow 2 per cent this year, with growth of 0.9 per cent over the first half of the year. The latest figures from the Office for National Statistics, published last month, show growth slowed more sharply, expanding just 0.5 per cent over the first half of the year.
The BoE’s Monetary Policy Committee met on Wednesday to decide whether to raise interest rates and will publish its decision on Thursday. Sir Charlie and John Gieve, another former MPC member, said on Wednesday there was a strong case for starting to raise rates quickly but gradually, as there is uncertainty about what impact higher rates would have.
However, Sir Charlie said members of the MPC may fear being blamed if they raised rates now and then economic growth slowed.