Goldman’s Broadbent Sees U.K. Economy Weathering Government Budget Squeeze

Britain’s economy can withstand the government’s budget squeeze and an interest-rate increase, according to research published this week by Ben Broadbent, the Goldman Sachs Group Inc. (GS) economist who will join the Bank of England’s rate panel in June.

“The fiscal adjustment that the government plans over the coming years is undoubtedly severe,” London-based economists including Broadbent wrote in an e-mailed note dated March 6. “Nevertheless, we take a more sanguine view than many of its impact over the medium term.”

Broadbent, who previously worked at the Treasury and Columbia University, will replace Andrew Sentance on the central bank’s Monetary Policy Committee on June 1, the Treasury said yesterday. He sees investment driving U.K. economic growth this year and his projections for expansion are above the median forecast of economists in a Bloomberg News survey.

While it’s “hard to see much growth” in incomes and consumer spending this year, the economic impact from any potential interest-rate increases by the Bank of England may be limited, Broadbent wrote in the note with economists Kevin Daly and Adrian Paul.

“Investors are concerned that any increase in interest rates would seriously threaten overall economic growth too, both directly, via the effects of cash-flow on consumer spending, and indirectly, by raising the rate of default in the mortgage market,” the economists said. “This concern is understandable but, in our view, it is routinely exaggerated.”

Growth Forecasts

Goldman Sachs sees a U.K. expansion of 2.4 percent this year and 2.5 percent in 2012, according to the note. The median estimate of 16 economists is for growth of 1.7 percent this year. The economy may expand 2 percent next year, according to a separate survey.

Goldman recently changed its U.K. rate forecast, and sees the central bank raising its benchmark rate by a quarter point in May and in each of the subsequent two quarters, having previously expected the first increase in the fourth quarter.

Broadbent will join a committee that has split four ways on policy for the first time since the central bank’s independence in 1997. With inflation at twice the bank’s target and the economic recovery threatened by the government’s fiscal squeeze, policy makers are divided on whether to increase interest rates or expand stimulus.

The bank’s rate-setting panel starts its next two-day policy meeting tomorrow. Last month, Sentance voted to increase the benchmark interest rate by 50 basis points from a record low of 0.5 percent. Martin Weale and Spencer Dale called for a 25 basis-point increase, while the remaining six opted to maintain the current rate. Adam Posen voted to expand the bank’s bond- purchase plan.

“Sentance was at the extreme hawkish end of the MPC but we do not think his loss will divert the focus of the committee,” said Jens Sondergaard, an economist at Nomura International Plc in London who previously worked at the Bank of England. “In our view, Mr. Broadbent will join the hawkish end of the MPC. His view has tended to be more optimistic than the consensus.”

To contact the reporter on this story: Fergal O’Brien in London at fobrien@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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