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'Fragile recovery' for UK economy 'Fragile recovery' for UK economy
(about 1 hour later)
The Bank of England has warned that the UK economy still has some way to go before it recovers from the effects of the financial crisis.The Bank of England has warned that the UK economy still has some way to go before it recovers from the effects of the financial crisis.
In its latest quarterly Inflation Report, the Bank warns that any recovery in 2010 will be "fragile".In its latest quarterly Inflation Report, the Bank warns that any recovery in 2010 will be "fragile".
The report will be bad news for the chancellor, who has predicted that the UK will rebound sharply in 2010.The report will be bad news for the chancellor, who has predicted that the UK will rebound sharply in 2010.
If it does not, then his record budget deficit of £175bn will be even bigger, with a greater need for spending cuts.If it does not, then his record budget deficit of £175bn will be even bigger, with a greater need for spending cuts.
On the outlook for inflation, the Bank said it was "more likely than not" that the annual rate of growth in consumer prices would temporarily fall below 1% in the autumn.On the outlook for inflation, the Bank said it was "more likely than not" that the annual rate of growth in consumer prices would temporarily fall below 1% in the autumn.
'Uncertain pace''Uncertain pace'
The Bank has recently added another £50bn of new money to the economy, as part of its programme of quantitative easing (QE) to spur economic growth.The Bank has recently added another £50bn of new money to the economy, as part of its programme of quantitative easing (QE) to spur economic growth.
Its report said there were "encouraging signs" that the steps taken to stimulate the economy had been having an impact.Its report said there were "encouraging signs" that the steps taken to stimulate the economy had been having an impact.
However, Bank governor Mervyn King was downbeat about whether the policy had been fully effective.However, Bank governor Mervyn King was downbeat about whether the policy had been fully effective.
Given the depth of the recession, to erode the margin of spare capacity will require an extended period of robust growth Mervyn KingBank of England governorGiven the depth of the recession, to erode the margin of spare capacity will require an extended period of robust growth Mervyn KingBank of England governor
He hinted that the Bank might have to consider additional measures, although he warned that with the public finances in such a perilous state, there was little room for further expansion to help boost economic growth.He hinted that the Bank might have to consider additional measures, although he warned that with the public finances in such a perilous state, there was little room for further expansion to help boost economic growth.
"The pace of recovery over the next few years is highly uncertain," he added."The pace of recovery over the next few years is highly uncertain," he added.
Following his comments, economists suggested the bank would inject more new money into the economy.Following his comments, economists suggested the bank would inject more new money into the economy.
"More quantitative easing is on the cards," said Charles Davis from the Centre for Economics and Business Research. "Our rough and ready estimate is a further £50bn.""More quantitative easing is on the cards," said Charles Davis from the Centre for Economics and Business Research. "Our rough and ready estimate is a further £50bn."
"The reality of a deep recession and sluggish recovery has dawned upon [the Bank], recognising that insipid growth and downward pressure on prices is the greater concern.""The reality of a deep recession and sluggish recovery has dawned upon [the Bank], recognising that insipid growth and downward pressure on prices is the greater concern."
Spare capacitySpare capacity
The weak outlook for inflation was driving the Bank to continue with its policy of QE for the foreseeable future, deputy governor Charles Bean said.
Mr King warned that "given the depth of the recession, to erode the margin of spare capacity will require an extended period of robust growth".
He warned that such a recovery could be "slow and protracted".
Since its last report in May, the Bank has revised its view of how deep the recession was during the last quarter of 2008 and the first quarter of 2009.Since its last report in May, the Bank has revised its view of how deep the recession was during the last quarter of 2008 and the first quarter of 2009.
It now says that the very depth will make any sustainable recovery unlikely until banks and governments rebuild their balance sheets.It now says that the very depth will make any sustainable recovery unlikely until banks and governments rebuild their balance sheets.
What this means in practical terms, says BBC economics reporter Steve Schifferes, is that it does not expect banks to resume large-scale lending for some years to come.What this means in practical terms, says BBC economics reporter Steve Schifferes, is that it does not expect banks to resume large-scale lending for some years to come.
And the need for further cutbacks in public spending and or higher taxes will add to the deflationary pressures on the economy, our reporter adds.And the need for further cutbacks in public spending and or higher taxes will add to the deflationary pressures on the economy, our reporter adds.
The governor refused to be drawn on whether he regarded the Conservatives' plans to hand over regulatory powers to the bank as a good thing. Downside risks
But he did warn against "half-baked" schemes of financial reform being adopted at the upcoming G20 summit. The Bank has identified several downside risks that could make the recovery more fragile.
First, unemployment could rise even faster in the future. The Bank says that so far, unemployment has fallen more slowly than in previous recessions.
That could be because workers have become more flexible, and are willing to work shorter hours, and for lower pay, than in previous recessions.
But the report warns that "if demand does not recover sufficiently, it will become more difficult for [firms] to maintain employment."
Higher unemployment rates, in turn, could further dampen down consumer demand, and also limit the modest recovery in the housing market.
Sterling fears
In relation to inflation, the main pressure pushing inflation upwards has been the effective 20% devaluation of sterling since the financial crisis began.
This has helped manufacturers by making their products cheaper abroad, but it has raised the prices of imported goods sold in the UK.
This effect has been modest so far, because the weakness in the economy has prevented firms from raising prices - but if there was a sustained recovery, a further fall in sterling which raised inflation would force the bank to raise interest rates.
This seems some distance away, however, as the Bank's current projections for inflation suggest it will still be under its 2% target in two years' time - suggesting that interest rates will stay at around 0.5% for a long time to come.
In addition, the governor refused to be drawn on whether he regarded the Conservatives' plans to hand over regulatory powers to the bank as a good thing.
But he did warn against any "half-baked" schemes of financial reform being adopted at the upcoming G20 summit.