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Bank of England's Forecasts "Economic Nonsense" says Toscafund's Savouri

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The Bank of England's forecasts for a long and enduring UK recession has been branded unrealistic by Savvas Savouri, Chief Economist and Partner at hedge fund Toscafund Asset Management.

In fact, the Bank is so wrong in its predictions the economists who drew up the predictions will be "embarrassed" and will choose to omit their time at the Bank from their CVs, says Savouri.

"I do not accept that a statistical recession looms. Yes, we might, just might see real GDP fall in Q2. Thereafter, I see little or no chance of what the BoE projects will be another decline in Q4, followed by its staggeringly-stupid prediction of SIX further sequential falls," says Savouri in a note following the Bank's August 04 decision to raise interest rates.

But it was not the outsized 50 basis point hike that attracted the attention of the general public; rather it was the dire warnings of a looming recession contained in the Bank's Monetary Policy Report (MPR).

The MPR revealed the Bank's economists see inflationary pressures in the UK rising from 9.4% in June to just over 13% in the fourth quarter of 2022.

Inflation is expected to remain at very elevated levels throughout much of 2023, before falling to the 2% target two years ahead.

The UK is now projected by the Bank's economists to enter recession from the fourth quarter of this year.

The below chart from the Bank is quite remarkable in that it implies the UK economy will not grow again, at least for the next 3-4 years:



"How can an economy not grow when employment levels are rising thanks to unprecedented hiring intentions and so too, wages?" asks Savouri, noting the UK's strong jobs market and hiring intentions at businesses.

"Which sectors does the BoE in its "wisdom" predict will misfire to the extent they create a labour market reversal? The answer is that no reversal is possible for all sorts of reasons which should be clear to all, even if not the BoE," he asks.

Savouri observes the economy has a fundamentally healthy property market – both residential and commercial – and homeowners have never had as much equity in their homes.

This in addition to record high household savings.


Above: UK household savings – COVID amplified buffer. Image: Toscafund, ONS.


Homeowners are also now less exposed to moves in the base rate at the Bank of England thanks to the prevalence of fixed-rate mortgages.

"How can the UK economy with its fundamentally robust banks – and financial sector more broadly – misfire? The reality is that the UK economy is in SO MANY favourable dimensions light-years ahead of where it stood in 1979, 1989 and 2008," says Savouri.


fixed mortgages

Above: % of UK mortgage holders on fixed-rates – a real buffer from a rising base rate.  Image: Toscafund, ONS.


"To the Bank of England and its “economists”, I say this. You have no idea what a real recession looks like and will be proven so wrong. Indeed, you will be so embarrassed by what you have been part of that choose to hide from your CV the fact you worked in Threadneedle Street over a period which will go down in history as its forecasting worst," he adds.

He warns there is a risk that the Bank's own forecasts become self fulfilling in that they send the pound lower, push gilt yields higher, restrain business investment and hiring, and lower personal consumption.

"To those fearful of this risk I say yes there is a danger of such ‘”unintended” consequences, but no, they will not derail a fundamentally sound economy," he says. "The simple truth is that whatever the BoE may want to believe itself and persuade us of in turn, every sign we see heralding ‘hiring’, every new student and tourist flying into the UK, and export lifted out of it, thanks to a “weak pound”, flies in the face of the BoE because these only help lift the UK economy."

Above: UK wage and CPI growth with Toscafund forecasts – real wage growth ahead.