Britain’s foreign-investment hot streak has cooled and is unlikely fully to recover, according to one of the most senior officials of the Bank of England.
The City operated like a “giant hedge fund” in the run-up to the financial crisis, but a shrinking surplus on investment income from abroad could spook markets and trigger a sharp fall in sterling.
That was the warning from Charlie Bean, the Bank’s deputy governor responsible for monetary policy, in an exclusive interview with the Press Association.
Suggested official figures for growth and productivity may be inaccurate and could understate the real position;
Said the £375 billion of Government stock acquired under the Bank’s “quantitative easing” (QE) programme could be allowed to mature over 20 years or more, and never be sold back to the market;
Accepted the possibility that the British economy could be stuck indefinitely with low investment, low productivity and stagnant earnings.
Mr Bean, who leaves the Bank on June 30 after 14 years of service, said in a speech in Darlington that “for the recovery to be both sustained and sustainable ... we really want to see three things happen”. These were a rise in business investment, a pick-up in productivity growth and an expansion in exports.
Britain’s current account was last in balance or surplus in 1983, but, Mr Bean said, this need not matter in itself.
“The international net investment position is the most important figure.
“Despite our having run deficits for many years, this net position is close to balance.”
“Some of that is because of capital gains on our overseas investments, but in large part that is a result of our having run a surplus on investment income, in other words our investments abroad produced better returns than foreign investors achieved in Britain. Up to the crisis, we were a bit like a giant hedge fund.”
But, he added: “There has been a recent deterioration in that component of our current account performance. Is it likely to be long-lasting or temporary? My view is that it may come back a bit, but not all the way back to where we were before the financial crisis. Will that leave us in trouble? I would hesitate to say so, in the sense that countries can run deficits for years.
“But certainly an adverse net position would leave us vulnerable, making it more likely for the exchange rate to fall sharply were investors to lose faith in the economy. We have seen that happen in the emerging markets.”
A Sterling crisis is, however, unlikely in the near future, Mr Bean added, given Britain’s current good growth rates make the pound more rather than less attractive.
Regarding the other points in his speech, could it simply be the case that Britain is stuck indefinitely in a low-productivity, low-investment economy? Could this be the “new normal”?
“It is always possible,” said Mr Bean. “We do not fully understand the current weakness of productivity. We have done a lot of work on it down to company level to try to get a better picture. There have been some plausible explanations, one of which, of course, is the possibility that the official data may understate the position.”
Is that likely? After all, there have been suggestions in the past that the Bank has implied criticism of the performance of the Office for National Statistics (ONS) in terms of getting the growth figures right.
Mr Bean said: “The ONS is doing its best to measure what is happening, but inevitably it is an estimate. We are in a different position. Our job is to make use of all the indicators that are out there. Inevitably, this will lead to a slightly jarring picture. At times, you can take the view that the (current) official estimate of growth may underestimate it at the current juncture.
“Business surveys suggest output growth is a bit stronger than the official data. Employment growth suggests the same. There may be a measurement error in the data. This should not be taken as a criticism of the ONS. Inevitably, the ONS numbers are just estimates. The division of labour is that the ONS does its best to measure what is happening and we interpret.”
His 14 years at the Bank have included the financial crisis, the recession and huge changes in the area for which he is responsible, monetary policy, with the Bank interest rate at 0.5%, the lowest since the Bank was founded in 1694, and the purchase by the Bank of £375 billion of Government bonds, or “gilts”, to pump new money into the economy, the equivalent of more than 20 per cent of gross domestic product.
With the recovery under way, the spotlight has swung round to the question of when rates will rise and when the gilt stockpile will be sold back to the market. On borrowing costs, he said in Darlington that, when the Bank rate does rise, it will be below its pre-crisis average level of five per cent “for some time - I have something like a 2 to 3% range in mind here”.
On the winding down of QE, he said this would not begin until after at least the first rise in the Bank rate.
Could the entire £375 billion gilt mountain simply be allowed to run to maturity and never be sold back to the market?
Mr Bean said: “In principle, that would be one way of winding it down, to let the gilts mature naturally. It would take about 20 to 25 years. Then we would work out whether we owed the Treasury money on the arrangement or the other way round.”
But would this not be simply an accounting exercise, given that the Treasury is the Bank’s 100% shareholder?
Mr Bean said: “In that sense, yes. The Bank is a nationalised industry.”
But he believes any notion among the public at large that the Treasury has “cheated” in financing £375 billion-worth of borrowings using funny-money is “erroneous”.
Furthermore, while it is possible some of the gilts may end up bolstering the reserves that clearing banks hold at the Bank of England, Mr Bean makes it clear that the banks will pay for these, and not be given them for nothing.
As for his own plans: “The first thing I am going to do is take a holiday in Italy. Then I shall re-establish links with academia (he was a professor at the London School of Economics before joining the Bank) and, I hope, do some interesting things, including in my role as President of the Royal Economic Society.”
He added: “It will be only semi-retirement.”