Are you sure?

UK: Economy seen likely entering recession

  The economy is probably entering its first recession in 16 years, and the outlook has not worsened as rapidly as it has in the past month for a very long time, Bank of England Governor Mervyn King said on Tuesday.

 

In a speech in Leeds, King said the financial crisis had decisively raised the downside risks to inflation, which was why the Bank had cut interest rates by 50 basis points this month in tandem with other central banks. The failure of Lehman Brothers bank on September 15 had triggered an “extraordinary, almost unimaginable, sequence of events”, which ended with last week’s recapitalization of the banking system, he said. “It is difficult to exaggerate the severity and importance of those events.

Not since the beginning of the First World War has our banking system been so close to collapse,” King said, according to a copy of his speech provided by the BoE (Bank of England). “We are far from the end of the road back to stability, but the plan to recapitalize our banking system, both here and abroad, will I believe come to be seen as the moment in the banking crisis of the past year when we turned the corner.”

 

MORE RATE CUTS?

Despite his gloomy assessment of the economic outlook, King said the Monetary Policy Committee still had to balance the possibility slower growth would drag down inflation against the chance that current high rates become embedded in the system. “The outlook is obviously very uncertain -- both for the world as well as our own economy.... The prospects for oil and other commodity prices are difficult to assess. So too are the period over which bank lending will return to normal and the extent of the damage to business and consumer confidence.” “Moreover, the credit crunch affects not just demand but also the supply potential of the economy, complicating the assessment of the inflationary impact of changes in the level of demand.”

Most analysts expect the MPC to cut interest rates again in November after this month’s emergency cut in interest rates, and minutes of policymakers’ last meeting will be published on Wednesday. King said the banking crisis was bound to have an impact on consumer and business confidence but the bank recapitalization plan and lower oil prices might temper the gloom, with the bank aid getting lending started again and cheaper oil boosting spending power and bringing down inflation.

Housing market weakness, however, was likely to continue, he said after noting that prices had already fallen by around 13% over the year. “Indeed, it now seems likely that the UK economy is entering a recession,” he said. Figures due on Friday are expected to show the economy shrinking for the first time since the early 1990s in the third quarter. (Reuters)