The economy should start to recover around the end of the year but may still need a further boost from policymakers, Bank of England chief economist Spencer Dale said on Friday.
Prime Minister Gordon Brown is seeking agreement from the G20 developed and developing economies next week on more action to help the world economy, but Bank Governor Mervyn King said on Tuesday that the country had little scope for big spending plans.
Dale, like King, said Britain did have room for smaller scale measures, probably to boost jobs and training. “There may well be a role for further targeted and temporary stimulus measures,” he said at a London conference for the Association of British Insurers.
Economic data out on Friday showed Britain was in an even deeper recession than previously thought in the last three months of last year, with the economy shrinking by 1.6% rather than an earlier estimate of 1.5%.
“Although immediate prospects appear bleak, the substantial economic stimulus that is underway means that there are grounds for thinking that economic conditions may start to improve later this year,” said Dale.
“I think the risks around this central path are weighted to the downside, reflecting the possibility that the actions taken by the authorities around the world ... are slow to take effect. So there may still be more to do,” he added.
But once the recovery was underway, the Bank would have to be quick to rein in expansive policy to avoid future inflation. “When the time comes, we will be prepared to respond with equal vigor on the way back up,” he said.
FIRST BY MILES
Dale was followed on the podium by David Miles, the first public appearance by Morgan Stanley’s chief UK economist since it was announced he would take up a place on the Bank’s Monetary Policy Committee in June.
Miles was relatively upbeat about the economy, and backed Dale’s view that much of the fiscal and monetary policy stimulus had yet to be felt. “There are coherent reasons to be relatively optimistic on the UK outlook,” he said.
He suggested high debt levels, while not life-threatening, could push down gilt prices, which hit record highs in recent weeks because the BoE planned to buy them as part of its £75 billion ($107.4 billion) quantitative easing program.
“The fiscal situation is far worse than anyone imagined 12 months ago, yet gilt yields are lower. Is this sustainable?” he queried.
Monetary and fiscal stimulus could boost the economy by up to 5%, while the debt-to-GDP ratio could rise to 70%, he added.
But he also suggested demand for gilts would likely remain strong given looming changes to bank capital requirements and noted that current debt levels were far from unprecedented. “This is a time when it’s pretty helpful to look back at the long-term history rather than get fixated on where we are now,” he said.
Separately, Bank Deputy Governor Paul Tucker told an event hosted by the main financial regulator, the Financial Services Authority, that policymakers needed to be cautious on making big regulatory changes.
More research was needed on whether macroeconomics could provide a tool to tame swings in bank lending over the economic cycle, he said. (Reuters)