Member Article

King still talking “black clouds of uncertainty?

The Bank of England has cut its growth forecast to close to zero for the UK economy, as Governor Mervyn King says the “black cloud of uncertainty” still hangs over the country.

In a press conference to launch the quarterly Inflation Report, Mr King said it was difficult to know exactly what the future held.

The report notes that output has contracted in each of the past three quarters, but the underlying picture is “probably not as weak as the headline data suggest.”

However, the Governor said turmoil in the Eurozone made it difficult to look at what is in store for the economy, particularly as the crisis has fuelled rising bank funding costs, leading to higher rates for borrowers.

Mr King said: The economy will continue to face headwinds over the forecast period, from the fiscal consolidation and tight credit conditions at home, as well as from the difficulties in the euro
area and a broader slowing in the world economy.

“The recession in the euro area is damaging demand for our exports; a black cloud of uncertainty is hanging over investment; and the weakening euro is a further obstacle to the adjustment we need to make in our net trade position. Our efforts to bring about a rebalancing of the UK economy will require patience.”

He added: “Unlike the Olympians who have thrilled us over the past fortnight, our economy has not yet reached full fitness. But it is slowly healing. Many of the conditions necessary for a recovery are in place, and the MPC will continue to do all it can to bring about that recovery.

“As I have said many times, the recovery and rebalancing of our economy will be a long, slow process. It is to our Olympic team that we should look for inspiration. They have shown us the importance of total commitment when trying to achieve a goal that may lie some years ahead.”

ITV’s Laura Kuenssberg asked Mr King whether, after nearly five years after a ‘rebound’ was hoped for, whether the public should expect to remain permanently poor.

Mr King said that it was impossible to know how long it would take before a turnaround in the economy.

CPI inflation has continued to fall from its high of 5.2% last September, reaching 2.4% in June, with further falls expected.

KPMG Chief Economist, Andrew Smith, said: “More bad news: another forecast, another downgrade. The Bank has just slashed this year’s projection of 1% growth - made only three months ago – to nothing. Even that could prove optimistic: output will have to pick up sharply from now on if 2012 is not to be another recession year.

“Economic data will have been distorted by the Jubilee holiday and the Olympics, but there seems little on the horizon to lift the economy. Austerity measures have a long way to go at home and Europe, our main export market, is stagnating at best.

“The good news, to the extent there is any, is that inflation is falling rapidly. Real incomes should soon start to increase, providing some relief to households. But whether consumers will spend or continue to save remains to be seen.

“With inflation now projected to fall below target as early as the turn of the year, the door is wide open for more unconventional policy measures. Further quantitative easing is likely once the current tranche is completed in November. But with the MPC now having fully reversed its earlier optimism (a year ago it was forecasting 2% growth this year) even the previously dismissed measure of a reduction in interest rates is back on the table.”

Graeme Leach, Chief Economist at the Institute of Directors, added: “The message from the Bank of England is very clear. Less growth and inflation in 2012-13 means more quantitative easing and probably an interest rate reduction as well. But the most interesting fall-out from the Inflation Report is for fiscal, not monetary policy. If the Bank’s view on the economy comes to pass, the Chancellor faces a very rough road with the public finances as he tries to cut the deficit.”

Image by Ofer Deshe

This was posted in Bdaily's Members' News section by Tom Keighley .