Q8 Jesse Norman: Mr Bootle, just picking up the Chairman’s question about Cyprus, how bad is the balance of payments crisis in the eurozone at the moment?
Roger Bootle: The internal balance of payments crisis underlying it all is extremely serious. Of course, some countries have improved their position quite considerably—some of the deficit countries have reduced their deficit considerably—but that is what you would expect if you have a depressed economy; that is no signal whatever of an underlying improvement. Meanwhile the surpluses for Germany and, even more so, for the Netherlands, are absolutely astronomical. So the underlying problem is very serious indeed.
Q9 Jesse Norman: So the possibility exists that British growth could be adversely affected as the eurozone crisis rolls on further up the chain, Cyprus having proved another embarrassment.
Roger Bootle: Yes. I think, focusing on the GDP outlook for the eurozone, it looks to be pretty grim this year, with the likelihood of further contraction for the economy as a whole. Maybe Germany will resist that, but France looks pretty soft, and France is in a much weaker position than was true a year ago. Of course, we expected the peripheral countries to be weak, but for France to be weak as well is an added blow.
The relevance of the Cyprus crisis is twofold. First, it has undoubtedly made more people question whether the euro is going to survive. Cypriots and others were speaking about Cyprus perhaps leaving the eurozone. But secondly, and more importantly, the initial plan, which Michael Saunders—in my view correctly—rubbished a few moments ago, was not implemented, but the mere fact that it was raised has let the cat out of the bag. This means that whenever there is a crisis in Italy, Spain, Greece, Portugal or other countries, depositors are going to think, “This could get very ugly indeed,” and they are going to move huge amounts of money out of those countries into the German core. That is going to lead to huge problems—TARGET2 is the bit of jargon that is relevant here—with imbalances in payments between members of the European Central Bank system. That is going to place the Germans in a very difficult dilemma. They will have all this money pouring in, which they are then obliged under existing rules to recycle to the countries that the deposits are leaving, but the net effect is that the Bundesbank is holding this really rather large baby, with a huge risk attached.
Q10 Jesse Norman: When the Bundestag finance committee came to visit us recently, they suggested it was publicly understood that the cost to the German taxpayer could be of the order of €1 trillion to €2 trillion as matters stand. That is just a comment.
The OBR has forecast a reduction in growth over the next couple of years, down to 0.6% this year and 1.8% next year. Do you think those projections are about right, likely to prove soft or likely to prove optimistic?
Roger Bootle: As we all know, forecasting is a pretty dangerous game, especially, as Mark Twain said, when it is about the future. I think the forecasts are plausible, but I still find them a bit optimistic. Different people can no doubt quibble about all this. I suspect this year may be a bit softer. The forecast recovery that is in there for next year is, I think, too strong. There is no science behind all this, but as one moves forward in the forecast period, the OBR obviously sees a reasonable recovery beginning—later than was expected first of all, but still a reasonably paced recovery. My problem is that I cannot see at this moment where that decently paced recovery is going to come from.
Q11 Jesse Norman: Mr Daly, what do you think will be the main drivers of economic growth for the UK over the next three years?
Kevin Daly: Just to pick up that last point, I am a little bit more optimistic than Roger, and we are a little bit more optimistic than the OBR, on growth. There are three positives that we would see for 2013 relative to 2012. The first is that there has been a very significant easing in financial conditions as a result of the decline in the exchange rate, and, to a lesser extent, as a result of the rally in equity prices this year. The second positive is that the funding for lending scheme will, we think, have some success; I think it should have been introduced earlier and more decisively, but it will have some success in easing the availability and reducing the price of credit. The third is that household sector dynamics look a little bit more positive. Certainly that is not in an absolute sense, but relative to how they have looked in the past, they look a little bit better, with relatively high savings ratios and financial balances. Those are three positives that would lead us to be a little bit more optimistic than the OBR.
There remain a number of very large negatives to set against that. I would agree with the questions and previous answers that the euro area risk is the biggest among those. The second risk or drag on growth is, needless to say, the drag from the fiscal adjustment programme itself.
Q12 Jesse Norman: What about the risks, on the downside? What are the major risks to growth over the next three years? Obviously we have talked about the eurozone.
Kevin Daly: The eurozone is by far the biggest known unknown, if I can put it that way, and when we talk about risks it is difficult to do other than start with that and finish with it; it really is such a significant risk for the UK. If you look at the UK’s performance in recent years relative to other advanced economies, it has been the problems in the eurozone that have helped to drag UK growth down. That all said, I do not think it is all negative on the eurozone, as some of the adjustments have taken place at a more rapid rate than we expected—at least, than most market participants expected. Secondly, there is the composition of the growth within the eurozone: the UK’s trading partners are skewed towards countries that now see more positive signs, most notably Ireland but also northern Europe. But as I say, the biggest risk, going forward, is undoubtedly the eurozone.
Q13 Jesse Norman: A final question. Mr Saunders, there are some signs that market sentiment is picking up in the UK. Do you think that is true or does it have some way to go? Do you think that the Budget supported that process?
Michael Saunders: Financial market sentiment within the UK has picked up, but I do not think that that is because the economy is looking any better; I think it is more because the pound has been weak and markets are—I hope correctly—anticipating that monetary policy will be loosening further. That loosening is helping to float asset prices in advance of the loosening actually taking place.
Q14 Jesse Norman: This is discounting more QE, is it not?
Michael Saunders: Not just QE; in the Budget, the fiscal measures do not really affect the growth outlook either way. Frankly, they are astonishingly timid and limited in what the Government are trying to achieve: at a time when the economy has been so weak for so long, the fiscal measures are just not really significant either way. The changes to the MPC’s remit are more important. The loosening that I think will come through is not just QE, but probably further credit easing and perhaps other forms of monetary easing. The changes to the remit give the MPC a much wider toolkit that they can use, and encourage them to use it.