Insider Business Club: the economy

What are we likely to see now, in terms of interest rate increases?

David Kerns, economic adviser to the BCC

An increase in May is now a virtual certainty. The question is whether the
increase will be a quarter or half a percentage point.

The market now expects 50 basis points, half a percentage point increase, if
not in May perhaps in June. So clearly the news on inflation is not good.
Inflation is above target, it is higher than expected but I think that there is
a certain exaggeration in the way some people have reacted.

One must certainly not be complacent about inflation but at the moment all
markets say is that things are worse than expected, a reaction is needed and
they are going to get it.

There are too many people that think that the last ten years can be written
off. I think inflation is bad news and when there is high inflation you have got
to tackle it.

I think the MPC, in spite of the recent development, has been a success
story. However, I don’t think we should be too optimistic, we should be, to use
the words of the ECB, vigilant. We should not panic.

In the financial markets that [volatility] seems almost inevitable. I mean
the hope is that the growth will continue as it has so far in spite of financial

If we talk about five and three quarters percent and they end at 6% it’s
going to be difficult, but you are not going to decimate the economy. If you
look at about 7%, it’s going to be very nasty.

It is dangerous to talk about the end of inflation or the end of

All I can say is for me at the moment the main risk is overreaction on the
part of the central banks.

Is the reliance on consumer expenditure going to change?

Dennis Turner, chief economist HSBC

It’s expected to change, we have had, as the chancellor never tires of
saying, 58 consecutive quarters of sustained growth but there is a little
nervousness about the way we’ve achieved it.

We’ve been rather too dependent on consumption and borrowing by both the
private and the public sectors. So the amount of debt in the system now is at an
all-time high, particularly in the private sector.

If we are going to be able to sustain growth at the sort of rates that we
have seen recently, we need to find something to replace consumption.

So the government, the Treasury, the Bank of England have all been talking
about re-balancing the economy and their forecast for growth this year relied
heavily on a bit of an upturn in exports and a surge in investment.

But I think the strong pound and the nervousness about some overseas markets
are putting a question mark around the exports. And if you don’t get the export
performance, and consumption comes under pressure, why are companies going to

Now we have had the first quarter GDP numbers and there is another negative
there for manufacturing and a pretty robust 0.8% for services in the overall
mix. Something has got to change, otherwise the 3% growth that has been targeted
this year by the authorities is going to come in at a little bit less.

There is still a bit of a mystery about the way that consumers keep spending,
because the last national accounts figures show quite clearly that real
disposable personal income growth was a number not un-adjacent to zero. Yet
consumer spending is still growing, so borrowing is what fills the gap.

How is the international environment currently affecting us in the

Andrew Smith, chief economist, KPMG

If you look at the bigger picture, I think over the last three or four years
we’ve had a remarkably favourable global business environment in the sense that
we have had very strong global growth, probably now in the fourth year of
growth, growing around 5% in real terms.

You’ve got to go back several decades to find that. We have had low interest
rates – they are going up now – but I think it’s also noticeable that long-term
interest rates are actually staying pretty low and we’ve had very buoyant
financial markets. So we’re still in a period which historically is dramatically
favourable overall – obviously there are a few cracks appearing now.

The US slowdown is something of a worry. On the other hand, we have seen most
other areas, Japan, Europe and so forth actually ending last year on a pretty
strong note. So from that point of view, obviously nothing is completely broken
down, but clearly with the pound going up and the US economy slowing down,
people exporting into the States are going to find it rather more of a

On the other hand the pick-up in Europe where a lot of our exports now go, is
actually reasonably encouraging. But of course we haven’t gone up against the
euro, to anything like the same extent we’ve seen appreciation against the
dollar. To a large extent it is a continuation of the sort of environment that
we’ve had for the last few years. But as I say a few things now need to be

Clearly there is a very large shift going on in manufacturing with
manufacturers basically moving out into Asian economies where they can do it

Chaired by Andrew Sawers

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