MNI: BOE Ramsden: Saucer Shaped Growth; Wait-and-See On Wages

--Ramsden: Brexit Uncertainty Biggest Risk To Economic Outlook

By David Robinson

     LONDON (MNI) - Bank of England Deputy Governor Dave Ramsden on Monday

highlighted the dampening effects of Brexit on the UK economy, saying that as a

result of the vote to leave the European Union expansion is likely to be saucer

shaped, with a prolonged period of flat growth.

     Ramsden, who only joined the MPC in September, voted against the BOE

Monetary Policy Committee's 25 basis point rate hike in November. 

     In his inaugural speech as an MPC member, Ramsden noted the weakness of

wage growth and said that workers may have responded to Brexit uncertainty by

showing even greater flexibility, making it easier for employers to invest in

labour rather than productivity-boosting capital.

     "The idea that workers are responding to Brexit by showing increased

flexibility could mean that there is more room than headline measures of slack

suggest for the economy to grow without generating above-target inflation in the

medium term," he said.

     "The weakness in real wage growth, and the subdued nature of domestically

generated inflation mean I am not yet ready to discount the idea that labour

market flexibility is continuing to intensify," Ramsden added.

     Ramsden was at odds with some of his colleagues on the MPC over how to

interpret the recent mix of weak investment growth, strong employment growth and

low earnings growth.

     One view, that was supportive of the case for tightening, was that Brexit

had already hit the supply side of the economy, and reduced total factor

productivity (TFP), thereby "reducing the rate at which it can grow without

generating above-target inflation."

     Ramsden said that while he agreed that Brexit was likely to reduce TFP this

was a longer-term effect, which would become more manifest after the UK had

changed trading arrangements. Instead, he favoured the explanation that labour

market flexibility had intensified due to Brexit uncertainty.

     If wage growth does accelerate, Ramsden left the door wide open to a change

of mind on the case for tightening.

     He said he voted against the November hike because he was "willing to wait

for more evidence on the evolution of wage and domestic cost growth before

beginning to withdraw monetary stimulus."

     The Bank's own agents have found signs pointing to a pick-up in pay deals

next year.

     Ramsden said that domestically generated inflation has been running at

levels below those required to hit the 2% inflation target. Headline inflation

overshooting that target reflected the pass through from sterling's 18%

depreciation from its pre-referendum peak.

     According to Ramsden, Brexit uncertainty is likely to be prolonged, with a

lack of clarity over which path the UK wants to follow after leaving the EU. 

     The biggest upside risk to growth is from the lifting of Brexit uncertainty

but if uncertainty persists "I could see a case for demand growth, and in

particular investment growth, being weaker," he said.

     The Deputy Governor compared GDP growth to the forecasts that the MPC made

before the Brexit referendum, back in May 2016, with GDP growth 0.8 percentage

point lower in the year to Q2 2017 and business investment growth a striking 5.2

points lower and nominal wage growth 1.5 points weaker.

     Ramsden, a former top Treasury official, said that for those like him used

to 'v' or 'u' shaped falls and rallies in output UK post-Brexit growth has been

odd, as it has been "a saucer shaped slowdown and pretty unusual for that."

     "Given the long horizon over which the effects of Brexit could play out, we

are likely to be on the flat part of the saucer for some time," he added.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

[TOPICS: M$B$$$,M$E$$$,M$$BE$]