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Recession 'now likely' warns King Gloomy forecasts for UK economy
(about 4 hours later)
Bank of England Governor Mervyn King has warned that "it now seems likely the UK is entering a recession". The Bank of England governor and an influential think tank have predicted that the UK economy is likely to sink into recession in 2009.
He added that the British banking system had been closer to collapse earlier this month than at any time since the start of World War I. Mervyn King told business leaders in Leeds he was concerned about rising unemployment and falling house prices.
But speaking at an event in Leeds, Mr King said the country's banks had now "turned the corner", thanks to the government's £50bn bail-out package. Meanwhile, the National Institute of Economic and Social Research says the UK is on the brink of its first full year of recession since 1991.
He said the move would slowly lead to a resumption of normal bank lending. It says Britain will "suffer the worst setback" of all leading economies.
'Sticking plaster' The NIESR predicted that Britain's economy would shrink by 0.9% in 2009, with consumer spending falling by 3.4%, business investment by 3.8% and private housing investment by 17.1%.
Returning to the event that sparked the recent global banking crisis - US investment bank Lehman Brothers filing for bankruptcy protection on 16 September - Mr King said it was wrong to blame Lehman for starting a chain reaction. And it warned that if the government's £50bn banking bailout was not successful the recession could be even deeper and longer.
Let me extend an invitation to the banking industry to join me in promoting the idea that a little more boredom would be no bad thing Mervyn King "The British economy will suffer next year as it experiences the worst setback among the G7 countries," it said.
"It would be a mistake, however, to think that had Lehman Brothers not failed, a crisis would have been averted," he said. NIESR said its forecasts assumed that the Bank of England would cut interest rates to 4% early in 2009, although that would probably not be enough to bring inflation below its 2% target before the end of the year.
"The underlying cause of inadequate capital would eventually have provoked a crisis of one kind or another somewhere else." End of 'innocence'
While praising the swift work by global central banks to increase liquidity in the banking system, Mr King said this would never have worked on its own. Speaking on Tuesday night, Mr King said "it now seems likely the UK is entering a recession".
"Central bank liquidity is sticking plaster, useful and important, but not a substitute for proper treatment," he said. He also said the British banking system had been closer to collapse earlier this month than at any time since the start of World War I. Let me extend an invitation to the banking industry to join me in promoting the idea that a little more boredom would be no bad thing Mervyn King class="" href="/1/hi/business/7682914.stm">Read Hugh Pym's analysis
Mervyn King paints a bleak picture class="" href="/1/hi/business/7682914.stm">Read Hugh Pym's analysis But he did try to inject a note of optimism, saying that the government's rescue package would now lead to a slow resumption of normal lending.
Instead, Mr King said the part-nationalisation move by the UK government and other administrations was the only action that could cure the banking crisis, by restoring banks' capital bases.
"We are far from the end of the road back to stability, but the plan to recapitalise 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," he said."We are far from the end of the road back to stability, but the plan to recapitalise 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," he said.
Yet he cautioned that it "will take time before the recapitalisation leads to a resumption of normal levels of lending by the banking system to the real economy". Nevertheless, he said, the "age of innocence" of cheap lending between banks "will not quickly, if ever, return".
Especially as he said the "age of innocence" of cheap lending between banks "will not quickly, if ever, return". Moving on to inflation, the governor said there were welcome signs that it would come down from the "worryingly high rate" of 5.2% in September.
Falling inflation?
Returning his attention to the wider UK economy, Mr King said the most recent economic data pointed to a recession.
He highlighted unemployment rising at its fastest rate for 17 years, and the recent falls in house prices.
But moving on to inflation, he said there were welcome signs that it would come down from the "worryingly high rate" of 5.2% in September.
He said this was thanks to recent falls in energy prices back from the record highs of July.He said this was thanks to recent falls in energy prices back from the record highs of July.
While Mr King said the Bank of England was committed to bringing inflation back towards the government's 2% target, he more than hinted that there would be no rate rises for the foreseeable future.While Mr King said the Bank of England was committed to bringing inflation back towards the government's 2% target, he more than hinted that there would be no rate rises for the foreseeable future.
King: 'It now seems likely the UK economy is entering a recessionKing: 'It now seems likely the UK economy is entering a recession
He said the Bank would continue to set rates "to meet the 2% inflation target, not next month, or the month after, but further ahead, when the impact of recent developments in both credit supply and world commodity prices will have worked their way through the economy".He said the Bank would continue to set rates "to meet the 2% inflation target, not next month, or the month after, but further ahead, when the impact of recent developments in both credit supply and world commodity prices will have worked their way through the economy".
Concluding his speech by returning to the banking sector, he said he hoped for quieter times ahead. Concluding his speech, Mr King said he hoped for quieter times ahead.
"I have said many times that successful monetary policy would appear to be rather boring," he said. "I have said many times that successful monetary policy would appear to be rather boring.
"So let me extend an invitation to the banking industry to join me in promoting the idea that a little more boredom would be no bad thing.""So let me extend an invitation to the banking industry to join me in promoting the idea that a little more boredom would be no bad thing."
Mr King was speaking at a dinner organised by the CBI, Institute of Directors, Leeds Chamber of Commerce and the Yorkshire Forward business support agency.