Saturday, February 14, 2009

£30bn Gap of Gloom?

Shouldn't this be weeds in the picture, thistles and cowslips especially?
The lack of attention given to the Bank of England’s forecast for the economy is bizarre, according to the FT and other organs.
Mervyn 'Midas' King basically said the recession, from peak to trough, will be two times worse than the Treasury expects. Given that the BoE is showing a narrow V form to the recession and recovery, not a U or L shape, this is not at all so? The BoE chart is extremely optimistic, surely? I hate these fan-tail monte-carlo style forecast charts. They just tell me there is too much loose analysis in the modelling. Look at the range of possible GDP growth in 2010. That is shameful economic forecasting, especially if the central projection is merely the median of such a wide range of possible outcomes. I cannot believe this vouches for credibility in the BoE's or the Treasury's macro-economic models!
Anyway, the forecast knocks about £30bn to £40bn off official GDP forecasts, hits the Government tax take we are told by up to £20bn and raises the deficit from 8 to closer to 10 per cent of national income. You have to wonder why David Cameron decided to raise the 2% VAT cut in the Commons on Wednesday PM Questions and ignored the big “gloom gap” between Gordon Brown and the Bank of England. he got short shrift on VAT by being told that the IFS said it was effective - to the tune of about £12bn.
But, when it comes to Government Revenues where is the income from £185bn in treasury bills at 1% offset by $245bn in ABS received paying LIBOR plus say 25bp. That alone means £6.7bn. Add to this £57bn paying 9% worth another £5bn. On February 12 (Bllomberg), “Prime Minister Gordon Brown said bank shares bought by the British government as part of his rescue packages will ultimately make money for the taxpayer. ’I believe over time that the value of these shares will rise,’ Brown told a panel of lawmakers today.” let's assume the banks share rise 20% this year, which from their low base is feasible, that's another £10bn. A further £250bn in BoE swaps are likely, worth another £7bn. Total £28bn, repeatable in 2010 and 2011.
For those who are interested, the BoE calculations are based on this Bank fan chart and not a straight comparison with the Treasury forecasts, so the figures were put into a spreadsheet by Chris Giles, FT economics editor, who did the sums to find that, "The Bank’s forecast, after taking account of “downside” risks, suggested the economy would shrink by more than 3.5% in 2009 with only anaemic growth in 2010, ... far worse than the Treasury’s expectation of a 0.75% to 1.25% contraction in 2009 and 1.75% growth in 2010. From peak to trough, the risk-adjusted estimate from the Bank predicts a 4.6% economic contraction, about twice the latest Treasury forecast. The Bank’s prediction is that we are living through a period that is worse than the 1990s recession and on a par with the 1974 recession, but not quite as bad as the early 1980s. What is really terrifying is the Bank putting more than a 10% probability on Britain seeing no growth until 2013."
I suppose that to be a more than 10% probability that banks will not maintain their 2007 UK lending levels? What does this mean politically? According to the FT, "Brown and Darling’s PBR estimates were far too rosy". But, are they. This depends a lot on the effect of an 8% fiscal impulse. And that surely is the basis for the very sharp recovery.
Compared to all 20th C recessions, recovery averages 5-6 years to get back to pre-crash peak. The BoE fant tail media shows it could happen far quicker!
The FT says "the budget will be grim". No it won't, not for tax-payers, this is a borrow now, pay later maybe or maybe not? Also an 8% fiscal impulse is exactly becoming the international norm. If everyone does it then everyone benefits - no beggar-thy-neighbour strategies.
The FT says, "The chances of a noticeable upturn before the election are tiny." Not according to the BoE chart they're not!
See comment for more on 2nd Treasury Select Committee questionming of the banks.

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