Bank says UK 'in deep recession'
By Steve Schifferes
Economics reporter, BBC News
The governor of the Bank of England, Mervyn King, has warned that the UK
is "in a deep recession" in 2009 and said rate cuts may no longer work.
In its latest forecast for economic growth and inflation, the Bank says
that the UK economy will decline sharply in the first half of the year.
And it says that there is a significant risk that the recession will be
even longer and deeper than expected.
The Bank forecasts the economy will shrink by 4% from mid-2008 to mid-
2009.
And its central forecast suggests a decline of around 3% for the whole
of 2009, followed by a sharp recovery with positive growth in 2010.
But the length and depth of the recession will be dependent on the world
economy, Mr King said, with the risks still "significantly on the
downside."
Trade contracting
The Bank's forecast for 2009 is noticeably more gloomy than many others,
and is a particularly sharp revision of its own forecast just three
months ago.
Mr King pointed out that since the Bank's last forecast in November, a
severe economic downturn had taken hold around the world.
"Growth in the advanced and emerging market economies fell sharply
towards the end of last year. And world trade is contracting rapidly,"
he said.
The slowdown could be deeper if "the authorities at home and abroad are
only partially successful in improving the availability of credit and
restoring business and consumer confidence".
The Bank also said that inflation would remain below its 2% target by
the end of its two-year forecast period.
But business leaders are even more pessimistic.
David Kern, chief economist at the British Chambers of Commerce said
that the Bank's forecast for a recovery by 2010 "seems unduly
optimistic."
And Graham Leach, of the Institute of Directors, added that "we are well
into the financial crisis but the economic crisis is only just
beginning."
New policy options
The Bank of England has already cut interest rates from 5% to 1% in the
last five months in a bid to stimulate the economy - and made it clear
that it is ready to consider more unconventional measures.
The governor said that the efficiency of further rate cuts was now
"somewhat impaired" and hinted that new measures might be introduced
soon.
Mr King said that the "Monetary Policy Committee can and will take
action to return inflation to the target and so ensure that economic
growth will again match its potential".
He indicated that as well as interest rate cuts, the Bank was ready to
use a wider group of policy measures to increase the money supply, thus
easing conditions in the economy, including using a new £50bn facility
to buy up distressed commercial and corporate assets.
But he said in the future, the Bank could buy government bonds - or
gilts - directly in order to help increase the amount of money in the
economy.
In the US, the Federal Reserve has also hinted at taking such action,
but appears to have recently pulled back from the direct purchase of US
government debt.
But under a plan announced on Tuesday, the US central bank and the
Treasury plan to spend up to $1 trillion to buy up distressed consumer
credit assets to help boost spending.
Will it work?
Mr King said he was encouraged by the co-ordinated policy responses
around the world, but admitted that "the prospects for economic growth
remains unusually uncertain, not least because of the extraordinary
events of the past few months".
The big problem is how quickly credit markets will return to normal, and
whether business and consumer confidence will recover.
Mr King admitted that the further tightening of credit markets had made
monetary policy less effective.
And he said that the "collapse of confidence, or 'animal spirits' in
Keynes' description, is leading to falls in production and output".
"Restoring both lending and confidence will not be easy and will take
time," he added.
In particular, it can take up to 18 months for the economy to respond to
changes in monetary policy - even without the credit problems.
But he insisted that the unconventional monetary policy measures were
not new, but were tried and tested.
World problem
The Bank of England is hoping that the UK economic recovery can be
driven by "rebalancing the economy" towards exports and investment
instead of consumption, helped by the fall in the value of the pound.
But given the severe problems in credit markets, as well as rising
unemployment which is reducing demand for goods, the UK recovery will be
unusually dependent on conditions in the world economy.
Mr King said there was still a need for urgent co-ordinated action on a
worldwide scale to help the recovery.
This could include action at the G20 summit in April to give more powers
to the IMF and World Bank to strengthen the world financial system, and
greater obligations on countries with trade surpluses -like China - to
boost their economies.
However, a recent survey by the IMF suggested that there are still wide
differences among the rich countries in how far they are prepared to go
in stimulating their economies.
Story from BBC NEWS:
http://news.
Published: 2009/02/11 13:07:44 GMT
Wednesday, 11 February 2009
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