In a speech entitled 'Goldilocks and the three years', LGIM economist James Carrick said increased expenditure would leave the UK more open to US rate rises, weak growth in the eurozone and reduced benefits from globalisation.
He said the effect was similar to cooking frozen food on a barbeque and burning it on the outside but leaving it uncooked inside.
Help to Buy bubble
Carrick said the government’s Help to Buy scheme was a “blatant” attempt to produce a pre-election “feel-good factor” and risked creating a housing bubble if the untested macroprudential measures the Bank of England has deployed fail to stop its growth.
He then questioned the BoE’s belief in the ample slack of the UK labour market, saying it was inconsistent with employers’ suggestions that recruitment difficulties were above average, despite an increase in vacancies.
He also said the potential turbulence surrounding the Scottish independence and EU membership referedums risked creating a reverse globalisation effect by disrupting trade and specialisation, raising prices.
“In an ideal world, the current fundamentals would continue alongside improvement in productivity and living standards, with sufficient measures in place to stave off a housing bubble. But this scenario seems too good to be true when the balance of variables needed to make it work are examined,” added Carrick.
“Policymakers will inevitably need to implement tightening measures at some point, and ideally his will be implemented in a measured and pre-emptive manner.
“Our concern is that policymakers react too slowly and that an inflation shock prompts a ‘slam-on-the-brakes-style’ aggressive policy response that could derail the economy.”
He said that ideally the UK would see an easing of recruitment difficulties, a decrease in house price inflation, the passing of the Scottish and EU referenda and progress in world trade liberalisation.
“But as we all know, life’s not a fairy tale,” he concluded.
