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Welcome to zombie Britain Mr Carney

A slight improvement in the UK’s economic outlook cannot mask the challenges facing the BoE’s new governor.

On July 1, Canadian Mark Carney took his seat as the 120th governor of the Bank of England and the Old Lady’s first foreign governor in its 319-year history.

He arrives at a time when the macro data is improving, the economy is seemingly heading in the right direction.

That’s the good news. The bad news is that he will find a household sector riddled with debt and overly leveraged towards a housing market that appears to be overvalued; a hawkish and wobbly coalition government struggling to rein in the nation’s public deficit; a corporate sector refusing to invest, with some parts surviving only thanks to low interest rates; and a banking system that is partly functioning, undercapitalized, and lacks competition. So, welcome to zombie Britain.

Such structural headwinds are of course immense, but there is optimism that Carney can help and change is almost certainly afoot.

Carney’s first move is likely to be to introduce forward guidance on interest rates, according to Azad Zangana, European economist at Schroders.

The Bank of England has always been reluctant to give explicit signals on the path of monetary policy because it felt it might reduce the flexibility it has in changing policy on a monthly basis.