The Bank of England may have ditched the V-shaped recovery but it's still too optimistic about the economy
One thing the Bank of England got right in its lengthy forecasts for the economy today: the risks of our projections are “skewed to the downside”.
And then some.
While Threadneedle Street’s finest have finally rowed back from their reality-defying V-shaped recovery, they still take too rosy a view of the parlous state in which we find ourselves.
Particularly in the near term.
In short, the Bank’s view was until today “bad this year, good next year”. Now, it’s “good this year, not so good next year”.
In reality, it should be: “horrible this year, horrible next year, a bit less bad the year after that. Fingers crossed.”
Its misguided optimism is based on recent surveys showing resilient consumer spending. But for many people, they’ve only been spending because the furlough scheme has given them the false idea that they still have a job.
Sadly, they will soon be disabused of that notion.
The Bank underestimates this. It places, for example, too much stock on Rishi Sunak’s £1000 payment to employers for bringing staff back off furlough. I haven’t met a CEO yet who’s said that will make a jot of difference.
It also bases its outlook on a Brexit featuring a full free trade deal on January 1. That’s punchy when the talks are at a stalemate.
It then gives too little emphasis to the long-term damage from the halt in companies’ R&D investment — already low post the financial crisis.
Predicting the future these days is a horrible task, but the Bank’s tendency towards optimism seems misguided. Leave the upbeat spin to the politicians.
