Bank of England pours cold water on recovery optimism

The Bank reckons the worst may be over - but recovery is likely to be much slower than people think...

by
Last Updated: 31 Aug 2010

The Bank of England clearly has no intention of joining the glass-half-full brigade: it’s just downgraded its forecasts for the UK economy’s performance this year, and warned that any recovery will be slow and painful. This gloomy pronouncement hasn’t gone down well with the markets today – the FTSE fell, and the pound dropped against the dollar and the euro. But perhaps it’s sensible to remind investors that their recent optimism may not be entirely well-founded...

The positive side of the Bank’s quarterly Inflation Report, released today, was that Governor Mervyn King did talk about some ‘promising signs’ – and he reckons the various policy and fiscal stimuli (plus the fall in the pound and the running down of excess stock) will probably mean activity rebounds ‘in the short term’. However, that was about as cheery as it got. None indicates how strong the recovery will be, he insisted – in fact, anything could happen as we wean itself off our debt addiction. ‘There are pretty solid reasons for supposing that there will be a recovery next year but also pretty solid reasons for questioning if that will be sustained,’ King said today. A pretty solid argument, we thought.

The Bank’s latest figures suggest that UK GDP could fall over 4% this year (it’s currently down about 4.5%.on an annualised basis) – and it’s not expecting growth to resume until next year. That’s a bigger drop, and a slower recovery, than the Government is currently predicting. The Bank also hinted that Alistair Darling’s projection of 3.5% growth in 2011 and beyond was pretty optimistic (fancy that). Meanwhile CPI inflation is expected to drop to 0.5% - and remain below the Bank’s 2% target for at least two years. Then again, the Bank also admitted that forecasting is a mug’s game at the moment: according to its figures, GDP growth by mid-2012 could be anywhere between 6% and -2%. Not terribly helpful.

It looks as though King is trying to pour some cold water on all this talk of green shoots of recovery – or at least, inject a bit of realism. Yesterday’s news that unemployment has jumped to 2.2m was a reminder that’s there much more pain to come. Today’s statement (coupled with last week’s decision to increase the quantitative easing budget from £75bn to £125bn) shows that the Bank isn’t taking the challenge lightly, even if some investors appear to be...


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Bank of England pours cold water on recovery optimism
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