The Bank of England has just come out with its quarterly inflation report.
The big headline is that recession for the next 12-18 months is almost certain.
A comparison with August's forecast is interesting:
Although the shape of the downturn is broadly similar, the current forecast has essentially shifted down between 3/4% and 1.5%. Note also that the BoE has been consistently optimistic in its forecasts---if you look at the balck "ONS Data" line, that is how things actually turned out. You might have thought that the statisticians at the BoE might have learned by now to take the pinch of salt into their own forecasts by now. (Actually, the optimism seems even worse than the graphic suggests. The Quarter 3 out-turn growth was a whisker above 0%, which is right on the outside edge of the outside August probability band. However, the BoE has decided to represent this graphically in the November chart as being on the inside edge of the outside band. (Ah! The rhetoric of charts!)
Anyway ... what we now know is that the BoE thinks we have a nastier and sharper depression coming than it thought in August. It is interesting -- particularly so given the election cycle that sees a general election by May 2010 -- to see what kind of shape they predict for the end of the depression.
Their central estimate is that things are getting better very fast by May 2010, with growth around 2% and the rate of change of growth very rapid --- things have been pretty bad just 6 months earlier. Sounds good for Brown. Indeed, one assumes that an independent bank must play the election calendar into its scenario-building, and must be assuming heavy government action in its central case.
In this respect, it is interesting to compare the August and November inflation forecasts. This is the current forecast of inflation:
And this was the August forecast:
In August, the rate of price growth rate was expected to fall for the whole 3 year forecasting period. Now, inflation starts to rise again (although from a lower base) already by mid-2010. This seems clearly compatible with a change in the basic assumptions about increased government borrwing and a lower sterling exchange rate.
Based on these BoE forecasts, Brown's window for an election in 2010 looks very tight---when incomes have started growing again and before inflation has shown the economy to come out of the depression in a pretty unproductive state.
And remember the BoE pinch of salt -- that will make the window even tighter.
