This “recovery” has been much weaker than previous cyclical upswings – and according to the recently published May Inflation Report projections, output is more likely than not to remain below its pre-crisis level for another year or so. There has recently been a lot of discussion about whether the UK has suffered a double-dip recession or not. But to focus on whether growth is a bit negative or a bit positive is to use the wrong reference point. Trend growth should be more like 0.6% a quarter and we have only had five quarters of growth at that rate or higher in the 21 quarters since the start of 2008. There had been no such weak period in the UK since quarterly GDP data were first published in 1955. Even compared with previous examples of financial crisis – whether at home or abroad – the UK economy has been puzzlingly weak for a long time. I want to take the opportunity today to offer a possible explanation that at least fits some of the data. Much of what follows has been used as a narrative in recent Inflation Reports. It is as if the different groups within our society – households, businesses, banks and the Government – have all decided that their future financial positions, on average, will be worse than they thought before the crisis. As economists, we would say “a reduction in estimated permanent income”. I will come back to reasons why, but, given that premise, we can explain much of what is happening.
But banks and building societies need to be seen as safe and sound to fund themselves and to secure other business. When banks are under-capitalised, raising capital can improve the market’s perception of their creditworthiness and so make it easier for them to borrow more cheaply. If we are to have a set of banks fit to provide credit and offer payments services to the UK economy, they must be better capitalised and less leveraged than they have been in the past. I want to make one point about this debate which bears repeating: if a bank becomes better capitalised that need not be at the expense of lending to the real economy – capital is actually a source of funding which supports lending. And an improved capital position, for most of the large lenders, need not come about by reducing real economy lending but by a number of actions such as restricting distributions (salaries, bonuses or dividends), by raising new capital or by running down other parts of their balance  BIS central bankers’ speeches  1  sheets. The FPC has always been explicit that banks should not meet the need for more capital by reducing lending to the real economy. The new FPC is one of a small number of macroprudential committees in existence. Few other advanced economies have delegated such macroprudential powers to a technical committee. Will it work to make the UK financial system more robust? I hope so.