Economic reality should quickly silence Carney critics

Timing can sometimes be everything in life, and there is little doubt that Bank of England Governor Mark Carney had the benefit of a modest economic tailwind in the United Kingdom when he took up his new post early last summer. The honeymoon went great, as they usually do, and the British press quickly discovered why some of us were so sad to lose one of our future Prime Ministerial candidates to the Motherland (see representative prior post “Carney strikes a populist tone” Sept. 16-10); temporarily or otherwise. Early in his new role, Governor Carney adopted the “Forward Guidance” tactic he used during his BoC days, and made it clear that he would “not consider tightening monetary policy until unemployment fell to 7 per cent so long as inflationary pressures remained in check.” By November, the BoE was prepared to declare that the economic recovery “has finally taken hold.” Music to everyone’s ears, no doubt. Even if it had a Canadian accent.

The recovery “taking hold” isn’t the same thing as a boom, mind you, as there were plenty of weak UK datapoints to go along with the bright spots. Just the same, for 2013, The Telegraph’s Jeremy Warner awarded the Governor an “A star” — which sounds pretty good to me.

And yet, others have begun chucking their tomatoes Governor Carney’s way, including the odd Canadian writer, who apparently hadn’t got the memo that Governor Carney is “Canada’s Ryan Gosling in the UK.” A few weeks ago, improvements in the UK unemployment data convinced some British commentators that the Bank of England would surely have to revise its forward guidance on interest rates. As if approaching a 7% headline unemployment rate was the only economic statistic that one should track as it manages towards a longer term inflation target.

I have no idea just how massive the Bank of England’s economic dashboard is, but there could easily be several hundred inputs to it. As we recently saw in the U.S., economic data is as likely to be in conflict as anything else, even in the same verticals. We had new U.S. home sales hitting a post-recession high, while new building permits were down. Is that good or bad? Both, actually, as I told BNN’s Catherine Murray at the time.

When the FT’s Chris Giles recommended earlier this week that Governor Carney “consider” raising rates, it wasn’t bad advice. At the same time, I’d be surprised if the last question Governor Carney asks himself each working day isn’t something along the lines of “what is the sum total of all the local and global economic data that I’ve seen and heard today”? But writers are known to spit out plenty of sage advice, even if it’ll fall upon deaf ears (see prior post “How about Carney as Minister of Economic Transformation?” Feb 8-11). More to the point, some, such as the Globe’s Brian Milner, miss the bigger picture. As Mr. Giles added in his FT column, he still “favour(s) holding off for a while longer” given what he’s seeing in the rest of the economy. Which is exactly what the BoE did yesterday.

How right Mr. Giles was, even if the path was a bit tortuous. Just this morning, RBC’s European Economics team reported that the UK index of production and construction experienced a “soft” November. Output remained unchanged on the month – when the market consensus was for a 0.4% move up. According to RBC, the news was “compounded by a modest (-0.1pp) downwards revision to October’s growth estimate.” As sectors go, few are more labour intensive than construction.

Now that the U.S. Federal Reserve Chair has been confirmed, Governor Carney and his most senior peers will invariably sit down soon and lay out a notional timetable for the Great Unwind. The Taper has begun in the U.S., but that’s only part of what’s to come.

Mr. Milner thinks Governor Carney has lost his “halo”. I’m with Bloomberg’s Marc Champion. Governor Carney knows what he’s doing.

MRM