15.07 Weekly Viewpoint : The Bank of England decided against an interest rate cut

Surprise: with an overwhelming majority vote of eight to one, the Bank of England decided against an interest rate cut, leaving the Bank Rate at 0.5%…………….

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On the other hand, it unanimously made the expected choice not to expand its security portfolio, stable for some time now at 375 billion pounds. This is not necessarily a sign that the economic impact of Brexit will be negligible. Although “the markets have functioned well” and buffered the impact of the referendum, the central bank acknowledges that “economic activity is likely to weaken in the near term”, reasserting that it expects a significantly lower path for growth and a higher path for inflation compared to those set out in the May Inflation Report. However, the view ultimately prevailed that it is appropriate to await more tangible evidence of the impacts, and to combine any monetary policy decisions with the release of updated forecasts, due on 4 August: to this avail, “most members of the Committee expect monetary policy to be loosened in August”, in ways depending on the forecasts and “any interactions with the financial system”. Already ahead of the meeting, Carney had remarked that the July and August meetings should be considered as a single “package”

In 2015, Ireland’s GDP grew by 26.3%. As well as reminding us how limited GDP is as a measure of welfare, this release should also prompt us to reflect on the further loss of fiscal leeway incurred by other EU countries which adopt standard growth models and are grappling with the legacy of high debt levels. The Bank of England has opted not to loosen monetary policy, while letting on it will do so in August.

On 13 July, the Irish Statistics Office published a short and embarrassed note to comment on the revision of national accounts for 2015, released the previous day, and based on which Ireland’s GDP grew by 26.3% y/y. The CSO observes that “GDP and GNP do not always help to understand what is happening in the Irish economy”, and that it is appropriate to also consider other indicators, such as personal consumption, employment data and retail sales. While these indicators draw a robust picture of economic activity, growth is well off doubledigit territory: employment was up by 2.6% y/y, and personal consumption by 4.5% y/y. Whereas GDP is 19.5% higher than its pre-crisis level, the disposable income of households is still 8% below the 2008 level,. The fact that GDP has exceeded its pre-crisis levels is due entirely to the capital depreciation component, to the point that net national income has only just returned to its 2007 level. In other words, the Irish economic miracle only benefited the country’s population in part, and this helps explain why the government in office was not rewarded at the latest elections.

As well as reminding us once again how limited GDP is as a measure of wellbeing, the Irish anomaly spotlights another problem, not of a statistical nature this time, but related to the very nature of our economic organisation. The 26.3% growth rate reflects the fact that multinational companies use Ireland to pay less tax, by locating their earnings in the EU member state which offers the most favourable conditions. This peculiarity led in 2015 to an anomalous and rather fictitious increase in capital stock (and of the intangible component especially), of value added in the industrial sector (+97.8% y/y), export and import flows, amortisations, and, lastly, of earnings. In Ireland, earnings now account for 37% of gross national income, versus 23% in Germany. The other side of the coin is the deterioration of the country’s net foreign financial position, at a deficit that more than doubled between 2013 and 2015, and which over time will translate into higher earnings paid to foreign entities (already up from 31.4 to 55.1 billion between 2014 and 2015). In other words, this strange set of Irish data tell us that some European Union countries (Ireland is not alone) are still adopting a growth model which relies heavily on stripping other member states of taxable base. Although within certain limits fiscal competition may be healthy, if fiscal optimisation becomes too widespread and if some players have their hands tied due to back debt issues, the risk is that the loss of independence in imposing taxes may force the adoption of policies which ultimately foster inequality and destroy social consensus.

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