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. 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.”
The pound was little changed against the dollar today and traded at $1.6197 as of 9:12 a.m. in London.
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.
The British Chambers of Commerce published a more pessimistic outlook for the economy today, cutting its 2011 growth forecast to 1.4 percent from 1.9 percent and saying the Bank of England should postpone rate increases.
A rate increase in May “will be premature and risky in view of the fragility of the recovery and tough fiscal measures expected in the budget,” said David Kern, BCC chief economist.
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 recovery threatened by the government fiscal squeeze, officials are divided on whether to increase the rate or expand stimulus.
The 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.