17th February 2012
His manner may have been typically gloomy, but Mervyn King introduced an uncharacteristic note of optimism into his appraisal of the UK economy this week. Amid all the ‘choppy waters' and ‘difficult times' he suggested that the UK was ‘on the right course' . This is high praise indeed from a man who until December was talking apocalyptically about the impact of the Eurozone crisis on the UK. Should we be encouraged at the apparent thawing of his position?
If his words were begrudgingly optimistic, the Bank of England's assessment of the UK in its latest inflation report verged on being positive :
"While predicting that 2012 will be another year of sluggish activity, the Bank thinks the pace of growth will pick up to around 3% by the start of 2013 and accelerate to between 3-4% in two years time. That is a remarkably bullish forecast given the "headwinds" King mentioned: weak credit growth, the determination of both households and companies to pay down their debts; the less than sparkling outlook for real income growth and, above all, the unfinished business in the eurozone."
Has he been told to be more cheerful? Without wishing to imply that King is anything other than studiously objective in his assessments, it comes coincidentally soon after Moodys put the UK on negative watch for its AAA-rating. As marky19821 on the Guardian site comments: "Mervyn's words can be translated as "please Fitch and S&P don't downgrade us…"
"In my several decades as a financial and economics commentator – covering banking crises dating back to the early 1970s and the Latin American debt catastrophes of the early 1980s – I have never heard a sitting governor talk in such apocalyptic terms about the parlous state of the global financial system."
He added: "Normally, one expects policy-makers to apply balm rather than fuel the sense of crisis – so as not to destroy confidence in the financial markets or frighten businesses and consumers. However, it is a sign of how helpless the Governor and his colleagues feel, in the face of the eurozone's inability to deal with its own problems, that they are sounding the alarm bells so loudly and ordering high street banks to prepare for the oncoming typhoon."
In fact, he spent much of last year warning of an imminent crisis.This led to some criticism for a perceived ‘talking down' of the UK economy, even from other members of the MPC . Andrew Sentance said: "The pronouncements of the Bank of England have done little to reassure the public or business. It could do more to instil confidence. We all recognise there is genuine uncertainty about the euro but it is not necessary for the bank governor to exaggerate and overplay these factors." There are even moves afoot within political circles to see the Governor brought ‘down to earth '.
Some see him as simply an ‘honest broker' with the neutrality that his position demands, but his comments have not always looked apolitical. This Telegraph piece reminds us of some of his more vociferous rhetoric – including his notorious ‘the Tories don't get it' quote:
"Conservative leaders David Cameron and George Osborne do not fully grasp the pressures they will face when attempting to cut back on spending, when "hundreds of government officials will make pleas of why their budgets should not be reduced." Both Cameron and Osborne have a tendency to think about issues only in terms of politics, and how they might affect Tory electorability." (King's remarks to US diplomats as reported back to Washington cable obtained by WikiLeaks).
In other words, King has shown himself as vulnerable to being blown about by the economic tide as others in the financial industry. In common with other economists and bankers he has tended to predict rather more crises than there have been, with the exception of the really important one. It is obviously good that he believes the UK is doing the right thing, but he has proved a relatively unreliable predictor of the economic climate and investors should only give him marginally more credence than they would the average economist.
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