Is the U.K. Recovery Sustainable?

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June 4 (Bloomberg) -- Kevin Daly, Chief U.K. Economist at Goldman Sachs, discusses the economic recovery in the U.K. and why deficit to GDP ratio matters. He speaks with Guy Johnson on Bloomberg Television’s “On The Move.” (Source: Bloomberg)

Recovery and the finances remain central to it all.

Questioning some of the relationships between some of the critical numbers?

Last year, the whole issue was whether demand would recover this year it focuses on how sustainable the recovery is, whether potential output and productivity will recover and whether the recovery is in balance.

The u.k. deficit in the last two quarters has risen to about five percent of gdp.

Close to a record level in terms of gdp for the current count deficit.

It has let a lot of people to question how sustainable that is.

In our note, what we discussed is come over time, although the u.k. has run for many years, not really says the 1990's has it to then running current account.

Deficits so the stock, the accumulation of all these flows, negative flows over time is nevertheless still positive.

Which seems remarkable.

But the justification or what has accounted for that is that the u.k. has been long as invested in a lot of equities and fdi a crawl -- fdi abroad which has appreciated over time while that investors in u.k. have invested into bonds predominately which have done less well over time.

The u.k. has benefited from its that investment position off setting these account deficits.

We expect the current account deficit is around two percent to 2.5% of gdp.

Better than many people suppose.

Many people have a significantly noller -- significantly lower number than that.

We have seen a downgrading in the last few weeks of the rates in the state -- in the states peg the u.k. is a little bit different.

We have a policy decision tomorrow.

No one is expecting a great deal.

Are you comfortable with the rate right now as it is projected by the market?

Are you comfortable where the terminal return going to be and are they as low as connie thinks it's going to be?

Our big picture view is that we are above consensus on growth.

We are below consensus on inflation reflecting our optimism on potential output of productivity and reflecting are below consensus views on inflation.

We are slightly more dovish on policy on the market.

We expected the first rate hike in q3 2015 versus market expectations around the turn of this year.

In terms of where policy ends out in the medium-term horizon, we are able that a 2% to 3% expectation is reasonable.

In the very long-run, i would expected the bank of england itself would also acknowledge that, in the very long run, something higher than that is likely but not within the trading horizon i think.

When you look at the advice given to the british at the moment, and there is a lot of advice being given up a moment, is there justification for it?

Is there any need to start pulling the levers on macro policy?

Is there a need to put a more progressive tax into the housing market?

Are those the sort of things that -- the advice is clear that that needs to happen.

Do you think it will be taken and do you think is necessary?

To a degree, yes.

This month, we would argue, although we are on either of another bank of england decision, for us the more important decision this month is the ftc decision.

They meet on june 17. the record of the meeting isn't announced until july 1. so we will have to wait a little bit for that.

One of the reasons why, in addition to optimism on potential output, one of the reasons why we are dovish is the belief that the bank of england is likely to tighten through marker potential markets first in the has a market.

It is a substitute to a degree for tighter monetary policy.

So more on the macro prudential side means more on the monetary policy do you think -- policy.

Do you think the treasury will work hand-in-hand?

Do you feel the fiscal side of things need to be part and parcel of this?

The big issue, the big controversy is about they how to buy scheme.

I wouldn't be surprised in september to see the mortgage guarantee being withdrawn or begun to be withdrawn at that stage.

More immediately come away expect them to tighten mortgage lending standards following the mortgage market.

In fact, you can argue this tightening has already begun.

It has begun.

One sees the headlines that u.k. banks are already tightening their mortgage lending standards.

Why, because it is better for them to do so independently in advance of being told the ftc to do so.

We are already seeing a tightening on mortgage availability.

Thank you.

Let's turn our attention to china.

It is the 25th anniversary on the deadly crackdown on protesters in tiananmen square.

For more now, a bloomberg columnist and all of his are expressed are his own.

Talk to me about the relationship between tiananmen and policy reform in china.

It is having an impact.

Indeed, it is impossible to delink the two.

This text has been automatically generated. It may not be 100% accurate.

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