Walk on the supply side needed for UK economy

Mark Carney ran a blistering time in the London marathon, trouncing most of the City as well as the handful of MPs so foolhardy as to run 26 miles just before an election. Take it as a coded expression of monetary dominance. The governor of Britain's central bank holds sway over the City and economy unmatched by any of his forebears.

Thankfully this is not an influence felt directly at the ballot box. Tradition and common sense require silence from the Bank of England during election season. Not every governor has managed to stay aloof: in 2010, Mervyn King thrilled headline writers with forecasts of political doom for whomever would emerge victorious, and then played no small role in the subsequent formation of the coalition.

Now the election has been decided, attention can return to what the BoE says about the UK economy, and by implication what it may do. A glance at May's inflation report contains little to surprise economists or alarm the markets. Bullish forecasts for growth have been lowered, in the light of a disappointing gross domestic product report; at 2.4 per cent they remain comfortably higher than in Europe and broadly match the US. Letters will continue to wing between Mr Carney and George Osborne, as inflation returns gently to its mandated level of 2 per cent. They will respectively explain and forgive a failure that worked out well for the chancellor: zero inflation, caused by cheaper fuel, gave the government a longed-for spell of rising living standards.

The BoE expects interest rates to lift off from next year, but has little to fear from acting too late. Wednesday brought news of yet another record employment rate and even signs of higher earnings growth. But wages have been so weak for so long that Mr Carney now describes the prospect of their remaining depressed as a risk. Unless the prime minister finds some way of repelling migrant labour (which happily eluded him for five years), the BoE can hold fire a while longer. In the meantime, the Tories' decisive win confirms the pursuit of fiscal surplus that they had pencilled in. The expected lay-offs, pay freezes, welfare cuts and broader austerity to come will dampen demand for some time.

With no immediate need for action, Mr Carney's thoughts have turned to the longer term, and a productivity challenge that concerns him as much as the chancellor. Weak productivity explains how exuberant job growth, middling GDP and disappointing fiscal revenues arrived together in one confusing package. If this pattern continues, Britain will experience price pressures long before wages lift off, forcing Mr Carney's hand. This would also make Mr Osborne's already tricky fiscal challenge nigh-on impossible - forcing him either to raise taxes or abandon his pursuit of a surplus.

But Mr Carney can do little about productivity, apart from keeping the financial system healthy. The chancellor on the other hand has an inbox stuffed with untried supply-side measures, none of them easy. The more obvious include beginning another runway at Heathrow, freeing up land for development around Britain's cities, and committing now to support EU membership in the promised in-out referendum. Each would draw resounding applause from business - and inflame plenty of Conservatives in parliament.

Between Mr Carney's race time and Mr Osborne's election win, the latter is the more remarkable. But having now outmanoeuvred his enemies at the polls, the chancellor will need all his cunning to nudge his friends in a more growth-friendly direction. Otherwise, the news from Threadneedle Street will not always be so pleasant.

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