15 Feb 2012

UK economy likely to ‘zig-zag’ predicts Mervyn King

The Governor of the Bank of England today predicted further quarters of negative GDP growth this year following the latest -0.2% slump recorded in the last quarter of last year. Britain’s economy is likely to “zig-zag” between positive and negative growth said the Governor, introducing the Bank’s quarterly economic healthcheck. Sir Mervyn said that the pattern would reflect “the additional Bank Holiday for the Queen’s Diamond Jubilee, so that it will be harder than usual to interpret official estimates of growth”.

After three years of interest rates at 0.5% and the Bank’s £325bn quantitative easing programme punishing some retirees, the Governor went out of his way to mention the plight of “savers that continue to receive negligible returns on their savings”.

“we all want to return to a more normal level of interest rates. But if we were to raise interest rates to such a level now that would only to turn a gradual recovery into a recession, put more people out of work, and cut the value of assets on which many savers depend,” argues Sir Mervyn.

The Bank’s inflation report continues to paint a picture of sluggish growth and above target inflation. The more positive news was that the bank feels its prediction for a sharp fall in inflation are being realised, and that should boost squeezed British consumers by the end of the year. The report seemed to communicate that the recently expanded QE programme was likely to be on pause, unless the euro crisis became markedly worse.

Unemployment figures released today also showed a mixed picture. 48,000 jobless were added to the unemployment numbers, taking unemployment to another 17 year high. The rise in unemployment did slow, however, prompting the Government to describe the picture as “flat”. Most City economists expect a further rise in unemployment in the coming months, however to nearly 3 million.

Sir Mervyn said he felt the UK financial system was prepared for what might emerge from the euro crisis. In Europe growth figures for the whole Eurozone today showed a slump of -0.3%, -0.2% for Germany. The French economy surprised most economists by posting growth of 0.2%. During the same period the UK economy contracted by 0.2%.

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