Britannia Radio

UK financial system 'not able to support recovery'

Britain's financial sector is not equipped to support recovery when it comes and could trigger a double-dip recession if not fixed, the newest recruit to the Bank of England's Monetary Policy Committee (MPC) warned yesterday.

 

By Angela Monaghan
Published: 8:15PM GMT 26 Oct 2009

Adam Posen said the issue was "the next target of concern" for the UK economy. Speaking at Cass Business School in London, he said: "I am concerned that the UK financial system as currently structured, as well as damaged by the crisis, may not be ready to support the coming handover of recovery to private-sector impetus from public-sector stimulus."

He said the main question was where credit for non-financial companies - particularly small and medium-sized enterprises - would come from. Without it, the emergence of a sustainable private-sector led recovery would be constrained, there would be insufficient investment into the UK economy, and a reduction in the number of businesses formed he said.

 

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Mr Posen said the banking system must therefore be "largely fixed" before macroeconomic stimulus is withdrawn. "The alternative is likely to result in a still-born recovery, a double-dip - though less severe - recession, and/or persistently slow growth," he said.

Mr Posen said history had taught us that those economies that have recovered "faster and stronger" have either fixed their banking systems quickly, or have alternative channels through which to provide capital to businesses.

"I am concerned because the financial system in the UK does not seem to have a spare tire for the provision of capital to non-financial businesses when the banking system has popped a leak."

He said in this way the UK drew a "worrisome" comparison with Japan in the mid-1990s, when recovery began but the economy was unable to sustain it.

Mr Posen insisted that the Bank's £175bn quantitative easing programme would not lead to "unacceptably high inflation at any time horizon." He added the MPC would keep the UK "well out of deflation" over the medium term.