Why the Bank of England is wrong

The Bank of England recently issued a forecast predicting zero growth in the UK this year – down from a prediction of 0.7 percent GDP growth three months ago. But the bank continues to downplay the United Kingdom economy because it is basing it on the wrong measure.

If you play conkers then you can recognise when someone is playing with stones rather than horse chestnuts. But what if the game is about winning and not sport? The problem with measuring the performance of the United Kingdom economy against the rest of Europe is that the Bank of England continues to regard it as a conker match and fails to see that the UK is an aggressive performer which does not compete on the same terms as most other countries. 

The UK is by far Europe’s single biggest exporter of foreign direct investment in the rest of the world. It is not another Germany producing manufactured products or a country with a service economy largely based on retailing or IT services. UK investments can be found all over the globe and it owes its success to a powerful financial sector.

For this reason GDP – which measures production within the confines of national borders – is not an appropriate measure of UK success. We therefore need to look at real gross national income (GNI) which takes into account the proceeds of foreign direct investments. And on that measure the performance of the UK looks very healthy – with significant gains for the last two available quarters in a row and a 5.7 percent improvement since Q3 2009.

Yes, Germany continues to outperform the UK in terms of real GNI – but because Germany’s economy relies on manufacturing it is necessary to offset the capital reinvestments required to maintain growth. On a net basis the UK economy is moving at an equal pace to Germany and there is every sign that this pace of growth could continue – unless companies believe the Bank of England and retrench.

Responding to the latest Bank of England forecast the secretary-general of the Federation of European Employers (FedEE), Robin Chater, said at a press conference that “a reliance on GDP as the only measure of economic performance can be highly misleading and we must recognise that the world is far from the position it was in during the Autumn of 2007. We are in danger of talking ourselves into a double dip recession and the UK has certainly reaped additional advantages in recent months from not being part of the eurozone.”


Robin Chater

Robin Chater is secretary-general of The Federation of European Employers (FedEE), the leading organisation for multinational companies operating in Europe, founded in 1989. Chater is a former director of the Personnel Policy Research Unit, head of practice at Cambridge Consultants, client consultant with HAY Associates Management Consultants and senior research officer with Incomes Data Services (IDS).