Britain has failed to rebalance from property and finance towards investment and exports, former FSA head tells Davos
The former head of the Financial Service Authority, Lord Turner, has compared Britain's rapidly recovering economy with the "hair of the dog" treatment for a hangover.
Speaking in Davos, Turner said the UK was responding to a cocktail of economic stimulus in the past five years – low interest rates, quantitative easing, and special government schemes to promote bank lending and mortgage borrowing.
"If you chuck enough monetary stimulus at an economy something happens. It is as if we have had a cracking great hangover, had a stiff drink and off we go again."
Turner, who was on the shortlist to be governor of the Bank of England before Mark Carney was chosen for the job, told an HSBC breakfast that the economy had reverted to its pre-crisis model of growth.
"In the UK from 2009 to early 2013 we kept surprising on the downside. For the last nine months we have been surprising on the upside.
"We have spent the last few years talking about the need to rebalance the economy away from a focus on property and financial services and towards investment and exports. We are now back to growth without any rebalancing at all."
Stephen King, HSBC's chief economist, said that there had been three surprises in the global economy during 2013: faster-than-expected growth in some developed countries, such as Britain and Japan; slower growth in certain emerging markets such as Brazil and India; and the sharp fall in inflation.
Turner said it had taken time for deflationary pressures to become apparent because a number of one-off factors had pushed up the cost of living. But he said the global economy was suffering from a major overhang of debt and was now struggling to find an alternative way of growing.
"For several decades before the crisis on average annual growth in credit was faster than growth in nominal GDP and leverage went up. Somewhere there is a limit to that and it was reached in 2008. Do we know how to run a capitalist economy where credit growth is in line with nominal GDP?"
Turner said economists who had predicted that quantitative easing, money creation by central banks, would lead to 1970s-style inflation had been proved wrong, and predicted that further measures would be needed if anti-deflation measures failed in Japan and Europe drifted closer to deflation.
He said further measures might then be necessary, including so-called "helicopter drops" of money, where governments never sell back bonds bought under QE and make the increase in the money supply permanent.
"I don't anticipate that in the next decade the Bank of Japan will sell Japanese government bonds (JGBs) back to the market."
While there were barriers to the European Central Bank adopting full-blown QE for the eurozone, Turner said there were other instruments that could be used and that "further exceptional measures" were a real possibility within the next year.