Professor Jonathan Haskel explains how the Bank of England measures the long-term economic damage (known as scarring) that shocks like Covid can cause.
He argues that the economy will be less damaged in the long term, than we feared. This is because fewer jobs have been lost, and companies have invested more in their businesses than we thought they would at the start of the crisis.
But because there is so much uncertainty about the future, he thinks interest rates should not be raised at this point.
- EA HICP inflation for Jun-21 was confirmed at 1.9% y-o-y while the ex-tobacco index also matched our forecast. Upside news in clothing was balanced by downside in package holidays where we moderate the potential positive payback in July.
- We continue to forecast another fall to a temporary trough in July, driven by weighting changes and base effects. The high 1.6% outcome would be below the current consensus, but our 2.9% peak and 1.6% average in 2022 are relatively elevated.
- Inflation data for the UK, Euro area and Sweden all printed over the past week. Upside in clothing offset downside in recreation for the Euro area with our overall forecast matched and little changed (see EA: inflation nears its temporary trough). Sweden was also in line, with even less news in the details (see FLASH: Sweden inflation in June-21). Unfortunately, the UK data surged, despite the binding effect of imputation. Upside risks broadly crystalised, especially in car prices, but with enough breadth to raise underlying inflation pressures (see UK: inflation jumps with underlying lift). The UK’s unemployment data were at least better behaved in matching our 4.8% forecast as the start of a turn back higher (see UK: jobs and UR distortions unwinding). We still expect activity data to disappoint the BoE later in the year, causing it to deliver a less hawkish policy than MPC members currently see as appropriate.
- Next week’s release calendar is light in number but heavier in substance as it contains the ECB decision and UK retail sales. The signal of the latter is complicated by the rotation back away from retail goods to higher-value services that mean not all declines are bad for the economy. We expect the ECB to indicate a continuation of its elevated bond purchase pace, abstracting from a potential lull in thin August markets. It should also emphasise the need to maintain stimulus and utilise the PEPP spending envelope, despite overshooting the 2% target later in the year. The more symmetric phrasing of its amended target makes it easier to tolerate an overshoot, especially when the medium-term outlook remains so subdued.