Mark J. Carney, the former head of the Bank of Canada who has just taken over as the governor of the Bank of England, presided Thursday over his first monthly meeting of the British central bank’s Monetary Policy Committee. The meeting produced no change in monetary policy, yet Mr. Carney was already being hailed as Britain’s economic savior. Mr. Carney may continue basking in the sycophancy because he is lucky enough to be in the right place at the right time.
He has arrived at the Bank of England at the precise moment that business surveys have started to suggest that the British economy is coming out of its recession on record. One of the main reasons for this turnaround has been the surge in housing prices and mortgage lending, the traditional driving forces of the British economy, this improvement, in turn, has reflected a bold new government backed borrowing program whereby the British Treasury is guaranteeing as much as £ 600,000 or $ 915,000 worth of new mortgage debt for anyone who can put up 5 percent of equity to buy a home. As a result, house prices are rising rapidly across Britain, mortgage lending has rebounded to its highest level since the Lehman crisis and home builder’s shares have almost doubled. Mr. Carney’s main weaponry of additional quantitative easing of increasing the money supply and buying government debt or other securities from the market to balance the economy and fight recession may no longer be required. The Bank of England can now act by injecting more liquidity to the commercial banks to finance the government’s planned credit expansion and to keep short term rates near zero.
Instead of trying to persuade the members of Monetary Policy Committee, which thwarted the efforts of Carney’s predecessor Mervyn King’s strategy of quantitative easing, Mr. Carney may succeed in reviving the British economy by making a few speeches showing his banking intellect to the Britons, thanks to the recovery.
But the subject of debate is what will be the impact on the British economy if Mr.Carney and George Osborne, the chancellor of Exchequer, manage to generate a continued property boom? Refloating the economy on a wave of property appreciation and mortgage borrowing would return Britain to debt driven, consumer led growth of the pre-Lehman period. It would also mean abandoning the structural rebalancing from consumption and services to exports and manufacturing, which any country would do to stabilize its economy and a ploy that Mr. King believed was essential to Britain’s economic rehabilitation. However, as Anatale Kaletsky a Reuters columnist opines “Britain’s economic history suggests that the conventional wisdom about the benefits of rebalancing from services to manufacturing may simply be wrong”. In the five years of attempted rebalancing since the financial crisis started in 2008, Britain’s economic performance has been appalling. Gross domestic product has lagged behind every country in the G-7 developed economies, apart from Italy. GDP is the broadest measure of living standards and productivity, has done even worse, falling 6.7 percent from its 2008 peak. But taking a longer view, incorporating the period before the fashion for rebalancing, a very different picture emerges of Britain’s economic performance. From 1993 to 2012, Britain had the strongest economy in G-7. Britain’s per capita income increased 50.1 percent in those 20 years, well ahead of the 40 percent increase in the next best country.
The economic structure in the period from 1993 to 2007, with its reliance on financial and business services, media and entertainment, research and education and even on property speculation may be better suited to Britain’s comparative advantages than to Mr.King’s pipe dream of a German style economy focused on manufacturing and exports.