UK recovery is off-track, says Mervyn King
Britain’s economic recovery is off-track, Sir Mervyn King warned on Tuesday night as he defended the Bank of England’s decision to pump money into the economy again by purchasing £75bn of gilts over the next four months.
As consumer price inflation surged to 5.2 per cent in September, close to a 20-year high, the Bank governor justified the resumption of money printing – designed to raise growth and prices – on the grounds that he now thought it would take longer to return the economy, public finances and interest rates to normality.
“We were on track,” Sir Mervyn told a business audience in Liverpool, “but the problems in the euro area and the marked slowing in the world economy have lengthened the period over which a return to normality is likely”.
The Bank governor already had a gloomy outlook. In January he warned that, after adjusting for inflation, wages were set to be no higher in 2011 than in 2005, the worst period of increases in living standards since the 1920s. On Tuesday, he indicated spillovers from the eurozone crisis now made even that assessment appear too rosy.
Rampant price rises, caused by gas bills hikes of 13 per cent and 7 per cent rises in electricity prices in September, have hit household incomes this year as wages have fallen further behind prices.
The public finances will also take a knock as the Treasury confirmed the September inflation figures are used as the starting point for increases in benefits next April. The Institute for Fiscal Studies estimated that social security costs would exceed the March Budget forecasts by more than £1.5bn and with further payments due on index-inked gilts, the public finances were likely to take a hit of close to £3bn in 2012-13.
Weak underlying prospects for the economy present the chancellor with a nasty backdrop to his November Autumn Statement, when he is likely to be forced to admit the deficit reduction plan is also off course.
Sir Mervyn said the bleak prospects for growth explained the Bank’s decision to resume asset purchases, justifying the move because underlying inflation excluding energy prices, import prices and tax increases “remains subdued”.
Once these causes of inflation “begin to dissipate, inflation should fall back sharply early next year,” the governor said.
Even with better news on prices just months away, hopes of avoiding what the governor warned might be a “recalcitrant” recovery, rested on China, Germany and Japan.
These countries – with large trade surpluses – should foster much higher private spending so that deficit nations such as Britain could grow through investment and exports, he said.
The task had already become more difficult because loose British monetary policy had encouraged people to bring forward spending, so “the ultimate adjustment of [UK] borrowing and spending will be even greater”.
Urging a bold response from other countries, Sir Mervyn warned: “Without a rebalancing of spending in the world economy, a struggle between debtor and creditor countries will inflict economic pain on everyone”.