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King to reveal pre-election forecasts as economists row over downturn

Guardian Economics 8th November 2009

Mervyn King will reveal the Bank of England's forecasts for the crucial pre-election period this week, amid a furious row among some of Britain's most prominent economists about whether the recession is already over.

With the poll due by June at the latest, Alistair Darling is hoping recovery will be under way by the end of this year, bringing the feelgood factor back to beleaguered British voters. But economists are sharply divided over whether the downturn will get worse still.

Many City number-crunchers were caught off guard by the 0.4% contraction in the economy in the third quarter, after business surveys had suggested firms were feeling more upbeat.

Led by blue chip investment bank Goldman Sachs, they have been rubbishing the official figures since they were announced last month, insisting recovery started in the autumn, and the downturn will be wiped away when updated figures are announced. Goldman analysts said the data, collected by the Office for National Statistics, was: "Unbelievable. Literally."

Even the Treasury is pinning its hopes on the ONS changing its calculations, and is delaying the autumn pre-budget report until after revised figures are released on 25 November, in case they make the economy look healthier. The slump looks much deeper than the 3.5% contraction Darling forecast for 2009 in the April budget.

But analysts at consultancy Fathom, several of whom used to work at the Bank of England, this weekend issued a furious rebuttal to the Goldman analysis, describing it as "baloney".

Fathom director Danny Gabay said the dispute was more than an arcane row among number-crunchers, because the Bank bases its monetary policy decisions on an assessment of the economy's health – and if the upturn has begun, rock bottom interest rates and the £200bn quantitative easing programme could unleash a devastating surge in inflation.

"If Goldman is right, then the Bank of England is currently in the midst of creating a massive policy error," he said.

The row about how soon the bank's recession-busting measures should be withdrawn mirrors the dispute between Darling and his shadow, George Osborne, about how soon the economy could withstand savage spending cuts.

The bank's governor, who will deliver the bank's quarterly inflation report on Wednesday, is expected to strike a cautious tone, after the monetary policy committee extended quantitative easing by £25bn last week.

"There is a sense that the bank is nearing the point at which it will hit the pause button," said Peter Dixon, of Commerzbank. "Thus, the emphasis of the press conference is likely to be the extent to which the policy has been successful and the nature of the economic recovery from here."

 
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