It has been a mixed start to the year for those poor CFOs who torment themselves by reading official economic forecasts. First up were the IMF which suggested that the United Kingdom would be the only major economy to shrink in 2023 with even Vladimir Putin’s Russia projected to see expansion. Whether the IMF also believes that North Korea might outperform the UK was, alas, not revealed.
Some compensation (of a sort) came with the Bank of England’s declaration that it thought that UK inflation would fall rapidly over the next few months and that any recession (and it was inclined to think that there will be one) would be shorter and shallower than the Bank itself has declared it would be but a few months earlier when it suggested that the downturn would be the sharpest of the post-1945 era. Despite this apparent cheery news for CFOs, it still hiked interest rates by 0.5%.
So, what is it to be then, champagne or cyanide? The IMF at least has a track record to consider. In every projection that it has made since the Brexit referendum of 2016 it has predicted that the UK economy would perform worse (sometimes very much worse) than has turned out to be the case. This is perhaps forgivable. The IMF is based in Washington, D.C., which is a long way from the Wirral. The notion that from such a distant perch it can pontificate with any precision as to what might be happening to the UK (or indeed any other country) strains plausibility. At best, it can identify trends.
What about the Bank of England though? They are the home team. It employs more than 4,000 people in London and Leeds and this includes hundreds of researchers and scores of fully-qualified economists. It sends out a small army of agents each year to talk to those in various aspects of the economy (including private equity and venture capital) for tips on what is going on across sectors. Surely our own Bank – which has been around since 1694 – has its finger on our collective pulse?
Up to a point. The truth is (and it is helpful for CFOs to appreciate this) that the Bank is a very strange organisation. As a consequence, it has a semi-detached relationship with the real world.
It is, in fairness, an institution which is intriguing. Its headquarters on Threadneedle Street is one of a kind. It has an atmosphere that has been described as close to monastic. With a network of places to eat and shop and a dry cleaners on site there is little reason to step outside of it during office hours. Indeed, until 2016 the Bank had its own bank so those who worked there could engage in personal banking without leaving the premises (presumably they stay at their desks and do it all online now). In the unlikely event that the multitude of economists did stray beyond the entrance in the middle of the day, the only “normal people” they would meet would be City bankers, who are not that typical.
It was considered something of a daring decision when Mervyn King was elevated to be Governor of the Bank of England in 2003 as he had “only” been on the site for twelve years
The culture of the place is hierarchical and intensely formal. Most figures, especially the senior ones, have been there a very long period indeed. It was considered something of a daring decision when Mervyn King was elevated to be Governor of the Bank of England in 2003 as he had “only” been on the site for twelve years (barely long enough to discover where the dry cleaners might be located).
The real revolution occurred when Mark Carney came to the Bank in 2013. He was Canadian. He had worked at Goldman Sachs in the private sector for many years. He seemed to have a side-line as a professional George Clooney impersonator in his spare time. He actively liked talking to the media.
It is hard to overstate what a cultural experience this was for the Old Lady of Threadneedle Street. Mr (now Lord) King had, like his predecessors from time immemorial, insisted that everyone address him as “Governor” (the fact that the same is probably true for those who lead prisons is immaterial). Mr Carney (as he remains) asked that the entire Bank staff (and anyone else who came across him) refer to him as “Mark” on the radical thesis that Mark, rather than Governor, was his name. This was verging on Marxism (or Markism). It was as if the current Chief of the General Staff and Head of the British Army, General Sir Patrick Sanders KCB CSE DSO ADC GEN (there may be more letters after his name) were to send out an email to the entirety of the troops asserting that “please call me Paddy”. This move alone set out the new leader from more than three hundred years of embedded tradition.
The striking feature of Mr Carney’s tenure (2013-2020) was that he did not automatically assume that raising interest rates was a good idea.
The shake-up did not stop there. The striking feature of Mr Carney’s tenure (2013-2020) was that he did not automatically assume that raising interest rates was a good idea. He thought that it was at least worth testing the hypothesis that allowing the economy to grow somewhat might be useful. Many of those before him had precisely the opposite instincts, namely if it moves, then clobber it.
The base rate when Mr Carney arrived at the Bank was 0.5% and received wisdom was that it had to start moving far higher at the slightest sign the economy was recovering from the financial crisis. Mr Carney disagreed. He only raised interest rates above 0.5% once in his whole time at the helm and slashed them aggressively twice: the first time in response to the Brexit referendum outcome where he wanted to shore the economy up from that shock and the other was at the very outset of the pandemic. His resolute stance made him a more important figure than any of the Chancellors that he served with. The humble CFO could sense that policy was largely predictable and related to the real economy.
In the three years that Mr Bailey has been in charge, the Bank has returned to what it deems to be orthodoxy. It has raised interest rates ten times in succession.
Normal service has now been resumed. Mr Carney’s successor, Andrew Bailey, started at the Bank of England in 1985. Prior to that he did a doctorate entitled The Impact of the Napoleonic Wars on the development of the Cotton Industry in Lancashire (which must be of huge value when attempting to assess contemporary gas prices). By contrast, Mr Carney’s thesis was on The dynamic advantage of competition which sounds like a better read for a CFO. The word “Governor” is back in vogue in the hallowed halls of Threadneedle Street. In the three years that Mr Bailey has been in charge, the Bank has returned to what it deems to be orthodoxy. It has raised interest rates ten times in succession. They may peak at around about 4.5%, but you should not bet much on them coming down swiftly.
All of which means, as far as economic forecasts from the Bank is concerned, local knowledge is not all that it could be (and until comparatively recently was). They might be extremely sophisticated in their structure and the product of some undoubtedly very intelligent people but nothing that a CFO should set their watch by. They are something close to astrology with equations. Whether the next Bank of England Quarterly Report will echo the numbers in the one it has issued or retreat to the doom and gloom of the one published previously or possibly hint at much sunnier uplands in the months to come is utterly unknowable. Best for a CFO to put the forecasts to one side and focus on the fundamentals of running a business.
