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King warns of 'choppy recovery' for economy

By Channel 4 News

Updated on 11 August 2010

As the Bank of England downgrades its growth forecast for the UK economy, Economics Editor Faisal Islam writes that Mervyn King's assessment about austerity and consumer confidence is music to the coalition's ears.

Mervyn King, governor of the Bank of England, warns UK economic recovery will be slower than expected

As the Bank unveiled its latest quarterly inflation report Bank of England, its governor Mervyn King also said that inflation would remain above its target of 2 per cent until 2012. 

But he warned that the journey out of the recession would not be smooth: "Looking ahead, the UK economy is facing a major re-balancing away from public and private consumption and towards net exports. 

"Achieving that re-balancing while confronting [economic] headwinds is likely to mean a choppy recovery."

When asked if June's emergency budget was to blame for a drop in consumer confidence, Mr King stopped short of apportioning any blame.

"It is difficult to know what led to the downturn in consumer and business confidence. It would be premature to link confidence measures to the budget."

Read the Bank of England's inflation report

The Bank's report added that household disposal incomes would be squeezed as a result of the deficit-tackling measures, with some companies likely to face lower public sector demand.

King's austerity assessment is music to the coalition's ears
The striking thing about Mervyn King today was his absolute unwillingness to countenance the idea that austerity had in itself created new risks for the economy, writes Economics Editor Faisal Islam.

He rightly pointed out that the austerity impact on reducing growth had to balanced off against the positive impact of reducing the risk of a UK government debt crisis. However he suggested in today's press conference that these two factors "broadly offset each other".

Read the article in full here

The report also noted that households have become more pessimistic in recent months amid persistent fears over unemployment and subdued wage growth.

But Mr King noted that although it was unclear whether the emergency Budget was to blame for a drop in consumer confidence, other measures it contained would help reduce the possibility of a sharp rise in long term interest rates.

The Bank's growth predictions have left a wide margin for error but James Mitchell of the National Institute of Economic and Social Research (NIESR) says this should not be seen as an indication that it does not know what is going to happen to the economy.

"There is a lot of room for manoeuvre in the Bank's projections. The charts show the uncertainty in economic forecasts and show how likely there are to be certain outcomes."

"It is unfair to say because these ranges are so wide that the Bank doesn't know what it's doing." 

However, former member of the Bank of England's monetary policy committee (MPC) Professor David Blanchflower told Channel 4 News he thought the forecast was "overly optimistic".

"Not least because consumer confidence has been dropping fast," he said. "I think the new coalition government has talked down the economy. There are extremely tough times ahead – as there are in the States, and the Fed’s had to stimulate the economy which may have to happen in the UK."

"The thing that worries me is there is no Plan B," he added.

Prof Blanchflower agreed with Andrew Lilico, chief economist from the think-tank Policy Exchange, that the Bank of England should already be pumping new money into the economy through quantitative easing (QE).

Mr Lilico told Channel 4 News: "I'm not sure one needs a Plan B. I think it would be useful for the Bank of England to print some more money (through quantitative easing) – that's the natural thing to go alongside the kind of fierce fiscal tightening that we've seen."

More from Channel 4 News
- FactCheck: Why did the UK have to borrow so much?

The Bank's report follows others today which also provide indications of the health of the economy.

Britain's largest building society Nationwide published its consumer confidence index for July which looks at consumer attitudes towards aspects of the economy and employment situation.

The survey showed that for the third month in a row, consumers' confidence in the economic situation fell.

Nationwide's figure of 57 compares with a rate of 100 in May 2004 long before the recession began.

Also released were quarterly unemployment figures which showed a slight drop in those out of work from the previous quarter.

Current figures show that 7.8 per cent of people, or 2.46m are out of work.

Are King's 'choppy waters' being felt on the beach?
After the Bank of England's prediction of a "choppy" future for the economy, Channel 4 News Chief Correspondent Alex Thomson spends a day by the sea in West Sussex to find out if holidaymakers and businessmen think a recovery is on the horizon.  

Down on the south coast at Pagham's busy holiday park it's like the punters' profile has taken a recessionary shift.  Coming in at their top end, plenty of people like Ken and Barbara Tester from Chichester who are coming here and not off cruising.

Read more here.

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