–Adds Detail, Quotes To Version Transmitted At 1822 GMT

EDINBURGH (MNI) – The UK economy is stronger than the upcoming
official growth data will show, Bank of England Monetary Policy
Committee member Adam Posen told reporters here, but the MPC faces a
tough challenge explaining that.

Posen said the latest construction data, which point to a sharp
contraction in that sector and could turn Q1 growth negative, were “just
odd” and were a key factor distorting the growth picture. He maintained
that the economy was recovering, and that inflation would return back
to, or below, its 2% target by the end of this year.

He acknowledged the difficulties explaining to the public that core
growth was what mattered and he said MPC members were concerned there
would be a hit to confidence if the headline Q1 and Q2 growth data
showed the economy contracting again.

Asked how concerned he was about the prospect of the UK
experiencing three consecutive quarters of negative growth Posen said “I
think the economy is stronger that what the data is going to show.”

He cited approvingly research by Goldman Sachs’ economists showing
growth running at well over 1% on an annualised basis. The problem the
MPC faces is getting the message the economy is growing through to the
public.

“The scarey part is we don’t want to spend our entire life saying
‘Oh, ignore this number, ignore that number’,” Posen said.

The official data showed the economy contracting in Q4, and some
analysts expect both Q1 and Q2 data to be negative as well.

“The concern expressed in the (April MPC) minutes was people will
see these three (growth) numbers and react to them … in negative
confidence terms. We don’t think they are justified but in the end it
could still be a real confidence shock,” Posen said.

“There is no good way of ducking that, one way or the other. If we
react to that (weak growth data) as though it is part of the core
forecast that is really very speculative. If we dismiss the data …
it’s not very credible. So we are just sort of stuck,” Posen said.

The recent, unadjusted, construction data, for the first two months
of year, point to a sharp contraction in Q1, but Posen along with his
MPC colleagues is very skeptical about them.

“The construction numbers are very odd. When we didn’t have a
terrible winter and we didn’t have falling house prices … that somehow
we had a far worse decline in construction this year than in the same
months last year, that is just odd,” Posen said.

“In 2012, the idea that construction which has already purged huge
numbers of firms and employees is somehow contracting further again is
not impossible but it is just odd,” he said.

For Q2 data, the extra Jubilee holiday will hit activity but Posen
said this is meaningless.

“It doesn’t mean anything about the productive capacity of the
economy … no-one is going to say I am not going to invest in Britain
because there are extra … bank holidays this year,” he said.

Posen said what mattered for the MPC was where inflation would be
in two years’ time, and he and his colleagues were not influenced by
quarterly growth fluctuations.

Posen withdrew his call to increase quantitative easing by Stg25
billion, which he voted for in March, at the April MPC meeting, voting
instead for no change in policy, this week’s MPC minutes showed.

Asked how the MPC could explain halting the expansion of QE when
official data could show the economy re-entering recession Posen said
“First of all, we are not turning off the QE taps. We are keeping the
same amount of water, not adding to it.”

He said the amount of loosening was determined by the size of the
balance sheet, as at least as a first order issue the stock not flow of
QE is what mattered.

Asked why he had switched his vote this month rather than in
February or March Posen said he had been on the fence over the extra
quantitative easing in both months.

Given the option of an extra Stg75 billion or Stg50 billion in
February he had voted for the larger number, when the MPC endorsed Stg50
billion, and then voted again in March for the extra but with core
inflation proving resilient he pulled his call in April.

–London newsroom: 4420 7862 7491; email: drobinson@marketnews.com

[TOPICS: M$B$$$,M$$BE$]