London | British businesses and consumers are in the grip of an exaggerated pessimism and anxiety that could stall the country’s economic rebound, the Bank of England’s chief economist Andy Haldane has warned.
“The prevailing popular economic narrative, among businesses and households currently, is unduly negative,” Mr Haldane told an economic forum late on Wednesday (AEST).
“It has emphasised recession and risk over recovery and resilience. It has resulted in good economic news – of which there has been plenty – being discounted too readily, and fearfulness about the future being accentuated.”
This bias to anxiety could become “self-fulfilling”, he said – and “now is not the time for the economics of Chicken Licken” (who thought an acorn landing on her head was the sky falling in).
Mr Haldane also used to speech to re-emphasise the Bank’s recent messaging that negative interest rates were not on the cards for “a number of months”.
He said the rate would go below zero only on three conditions: the economic outlook required it; the cost-benefit analysis on negative rates was positive; and other monetary tools were inferior to the task.
Mr Haldane, who has taken on a role in recent months as the Bank’s more bullish outrider, was speaking after the Office of National Statistics confirmed a second-quarter drop in British GDP of 19.8 per cent (revised slightly downward from earlier estimates).
But monthly data released earlier this month showed the economy rebounding 8.7 per cent in June and 6.6 per cent in July, powered by resurgent consumer spending.
“The speed and scale of the UK’s recovery has surprised on the upside, persistently and significantly, for at least the past four months,” Mr Haldane said “Since May, UK GDP has been rising, on average, by around 1.5 per cent per week.“
He said the Bank expected GDP was right now only about 3 to 4 per cent below its pre-pandemic level.
“There remains an average-recession-sized gap between output and its pre-COVID level. Nonetheless, had this economic outcome been offered as a forward contract in the early summer months, absolutely everyone would have been a buyer.”
Consumers ramped up spending on households goods and food, with a significant amount transacted online, while cutting back on travel and hotels. Restaurant spending surged during August, when the government subsidised meals via its “Eat Out to Help Out” scheme.
But consumer confidence remained low even as spending recovered, which Mr Haldane described as “puzzling”.
He sought the answer in psychology: humans over-estimate risks that are systemic or existential to lives and livelihoods (so-called “dread risks”), and would then tend to “catastrophise” – that is, “discounting the best and fixating on the worst, whatever the balance of risks”. This was especially true if people felt the risks were out of their control.
He suggested Britons were fretting about what he called “the unholy trinity”: a COVID-19 second wave, the spectre of a surge in unemployment yet to come, and a potential no-deal Brexit.
Mr Haldane said any lockdowns during the second wave were likely to be less severe than previously, and also affected “only a subset of spending, notably hospitality (7 per cent of total consumption) and work-related travel (also 7 per cent)”.
He admitted that the extent of any rise in unemployment, and the impact of Brexit, were hard to forecast – but that governments and businesses could take steps to mitigate some of the risk.
Cabinet minister Michael Gove last week warned that the present extent of business unpreparedness for a no-deal Brexit could see queues of up to 7000 lorries on the road to Dover in January, but Mr Haldane was more sanguine.
“I am confident UK companies will rise to this challenge [of Brexit], as they have to the challenge of COVID,” he said.