The most influential banks globally are expressing scepticism about the Bank of England’s macroeconomic assessment. A concerning proportion believes that the Monetary Policy Committee has misinterpreted global developments and is pursuing a tightening policy that could lead to a severe and prolonged economic depression.
Citigroup Warns of Economic Depression, Criticizes Bank of England’s Policy Stance
Citigroup has raised alarms about the UK economy, predicting a scenario resembling an economic depression unless there is a shift in policy.
The forecast includes zero growth for the current year, a contraction of 0.2% in 2025, and minimal recovery in 2026. Citigroup emphasizes the severity, highlighting a 0.7% fall in GDP per capita in 2023 and preceding declines in 2022.
Citigroup’s cautionary comparison envisions the UK’s economic trajectory as potentially surpassing historical downturns such as those after the Napoleonic Wars, World War I, and the 1929-1931 Gold Standard crisis.
The post-Napoleonic era involved challenges during the transition from wartime to peacetime economies, marked by demobilization and economic adjustments. After World War I, the UK grappled with war debt and reparations, contributing to post-war economic difficulties.
The 1929-1931 Gold Standard crisis saw a global recession triggered by the Wall Street Crash, exacerbated by the constraints of the gold standard.
Citigroup’s analogy suggests that the UK’s current economic path may lead to a more formidable downturn, emphasizing the urgency for policy adjustments to avert a historic economic setback.
The report from Citigroup essentially accuses the Bank of England of reluctance to acknowledge flawed models, suggesting a potential delay before making necessary adjustments. Citigroup states that a pivot towards easing would require the Monetary Policy Committee (MPC) to admit previous misjudgments regarding UK inflation dynamics.
Adding to the concerns, Sven Jari Stehn at Goldman Sachs challenges the Bank of England’s stance on inflation. Stehn suggests that “underlying inflation” is weaker than perceived, predicting a drop to 1.7% in the spring, with sustained low levels throughout the year, ending at 1.6%, and remaining below the target well into 2025.
He mentioned that the Monetary Policy Committee (MPC) is prone to delaying action, anticipating the need to implement five rate cuts later in the year. This strategy poses a notable risk of a substantial recession, prompting the necessity for emergency half-point rate cuts as early as the summer.
UK Faces Recession Risk as Calls for Immediate Rate Cuts Grow
Barclays’ Jack Meaning has expressed concern that the UK’s Monetary Policy Committee (MPC) might delay necessary rate cuts, risking a recession and necessitating emergency measures later in the year.
Calls for immediate rate reductions come from both the Treasury Select Committee and a shadow MPC of private economists. Former Bank of England chief economist Andy Haldane echoes these concerns, warning against over-tightening.
Core inflation in the UK is trailing behind the US and eurozone, raising worries about a contraction in nominal GDP, which could impact debt dynamics. Dario Perkins from TS Lombard underscores the importance of avoiding a contraction in nominal income.
The Monetary Policy Committee (MPC) is maintaining rates at 5.25%, despite concerns about stagnant wage growth. Two members advocate rate hikes, fearing that premature easing could trigger inflation. Critics note that average weekly earnings are growing modestly at 2.2% annually, emphasizing wage growth as a lagging indicator.
The apprehension among observers intensifies as they voice concerns over the potential erosion of demand in the labour market. The cautionary sentiment emphasizes that the Bank of England’s current stance, if maintained, could set off a self-feeding recession. The intricate dynamics of the labour market, with its complex ties to consumer spending and economic activity, heighten the stakes of the ongoing policy decisions.
This calls for a nuanced and strategic approach by the central bank to balance the necessity for economic stability with the imperative of avoiding a self-perpetuating downturn.
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