We have been reminded again this week that the British economy is not in a great place. The latest Office for National Statistics (ONS) data revealed that the economy contracted by a worse-than-expected 0.3 per cent in October.
The ONS pointed to some seasonal factors that may explain this outcome, such as wet weather. But the most likely, immediate reason for the slowdown is tight monetary policy, which reached 5.25 per cent in August. After initially dismissing the risk of inflation towards the end of the pandemic, the Bank of England insists on maintaining these rates for some time to come.
The Bank’s Monetary Policy Committee decided this week to keep interest rates on hold, and quite inexplicably, three members voted for a rate increase. The Bank is concerned that inflation remains above the 2 per cent target, still running at 4.7 per cent in the 12 months to October 2023.
But, as the IEA’s Julian Jessop warned this week, there is a clear risk that the Bank will keep rates higher for longer than necessary or desirable. The underlying problem is that the Bank focuses on backwards-looking indicators and is trying to regain credibility after past mistakes.
The Bank is downplaying the forward indicators, which show a sharp reduction in the money supply, producer prices and global energy costs. This misstep could result in the UK being pushed into the fourth recession in 15 years.
Beyond monetary policy, there are profound policy failings at the heart of Britain’s stagnation. Despite increasingly poor quality, the rising cost of public services has pushed the tax burden up to the highest in seven decades. The failure to reform the planning system means Britain lacks homes, cheap energy and infrastructure. The increasing role handed over to largely unaccountable regulators creates barriers to entrepreneurship and innovation.
There will be many more months and years of poor economic data unless the government is willing to take some serious steps towards reform. The alternative will leave Britain stuck as a stagnation nation.
