Bank of England’s pay forecasts too optimistic, say economists



LONDON: The Bank of England’s (BoE) growth and wage forecasts are too rosy, according to economists polled by Reuters who were divided on what a large Conservative majority in June’s UK election would mean for Britain’s divorce terms from the EU.
BoE Gov. Mark Carney said the forecasts hinged on a “smooth” transition to Brexit, as well as a big pick-up in wage growth and stronger exports and investment — things the central bank has predicted before, but which have largely not materialized.
Wage inflation would rise to 3.75 percent in 2019, the bank said. But all except four of the 26 economists polled this week who answered an extra question said that was unlikely or very unlikely. The median forecast was 3.1 percent.
“The risks have in our view shifted toward a hard Brexit, in which case the UK economy in 2018-2019 will be facing headline-grabbing reductions of UK operations by foreign corporations, relocation to continental Europe and lay-offs,” said Marius Gero Daheim at SEB.
“This environment does not bode well for pay increases in the order of 4 percent.”
British pay growth lagged inflation for the first time in 2-1/2 years in early 2017. Excluding bonuses, it rose 2.1 percent year-on-year in the three months to March, the weakest increase since July, data showed on Wednesday.
Since last June’s referendum vote to leave the EU, Britain’s stance has hardened. Prime Minister Theresa May has said she expects divorce talks to be tough and EU leaders have agreed stiff terms.
Previous Reuters polls have concluded that talks turning fractious would pose the biggest risk to Britain’s economy and to the pound.
Hoping to build a dominant position in parliament and strengthen her hand in the EU talks, May has called a snap election for June 8.
The prime minister’s ruling Conservative party has a runaway lead in opinion polls, a result which could give a vote of confidence in a vision for Brexit which now sees the country outside the EU’s single market.
But most respondents, who answered an extra question, did not take that view. A dozen said if the opinion polls were correct and the Conservatives get a sizeable majority, there would be no effect on the success of Britain’s divorce negotiations.
Nine said that outcome would bring about a more constructive relationship while six said it would add distance between the two sides.
The central bank said last week that Britain’s economy would grow 1.9 percent this year, 1.7 percent next and 1.8 percent in 2019, but median estimates in the poll were all lower — respectively 1.7, 1.4 and 1.5 percent.
Only 10 of the 60 economists polled were as or more upbeat about growth prospects this year than the bank. For 2018, the ratio was 11 of 58.
“The BoE’s growth forecasts appear too optimistic. They are conditional on a very smooth Brexit, which is unlikely,” said Daniel Vernazza at UniCredit.
Sterling is down well over 10 percent from levels ahead of the June referendum and its weakness is stimulating domestic inflation. It is unlikely to move far in the coming year, according to a Reuters poll earlier this month.
The premier, meanwhile, said she would tighten laws on company takeovers and would ensure any foreign group buying important infrastructure did not undermine security or essential services if she wins next month’s national election.
“We will require bidders to be clear about their intentions from the outset of the bid process; that all promises and undertakings made in the course of takeover bids can be legally enforced afterwards; and that the government can require a bid to be paused to allow greater scrutiny,” the Conservative Party said in its election policy document.
It also said the Conservatives “do not believe in untrammeled free markets” as it set out plans to cap rising energy costs for consumers.
The prime minister continues to believe that no Brexit deal would be better than a bad deal, according to the document.


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