King adds to gloom over UK economy
Sir Mervyn King and other Bank of England policy makers warned MPs on Tuesday that the economic situation had deteriorated so severely that they had ripped-up their forecasts of six weeks’ ago.
The BoE governor said he was gloomy about the UK or other leading economies staging a robust recovery from the crisis until the eurozone had resolved its problems decisively.
In some of his bleakest remarks to date, coming soon after weak public finance figures, he cautioned the public not to think Britain was even half-way through the crisis, which started almost five years ago.
“When this crisis began in 2007-2008, most people including ourselves did not believe that we would still be right in the thick of it, in the middle of it, quite this late,” Sir Mervyn told MPs on the Treasury Committee.
“All the way through, I’ve said to this committee that I don’t think we are yet half-way through – I’ve always said that and I’m still saying it.”
The BoE governor said he had called for more money-printing under the £325bn quantitative easing scheme in June because the situation had deteriorated so far from the monetary policy committee’s May forecast.
That had shown a recovery to 2 per cent annualised growth rates by the second half of this year followed by an acceleration in 2013.
“In the last six weeks,” he said, “I am very struck by how much has changed since we produced our May Inflation Report.”
Describing himself as “pessimistic” about developments in the eurozone, Mr King said, “I have no idea what is going to happen in the euro area”. This led him to be unwilling to make what he said would be a “stab in the dark” about when the UK economy could return to normality.
“It is impossible to imagine a situation in which you just do not know what the situation will be in a part of the world that is close to you and is half of your trade. And that makes it impossible to engage in any sensible forecasting.”
The chilling effect of the eurozone crisis was wreaking havoc with investment decisions of companies in the eurozone, the UK and in the rest of the world, Sir Mervyn said.
“The confidence that is particularly lacking now is the confidence to invest today rather than wait and see what happens to the euro area and other developments over the next two years.
“It is postponing decisions that companies fully expect to take at some point – that now is not the time to commit. If everyone does that, then you do indeed get a self-fulfilling downturn in the economy.”
The only solution Sir Mervyn saw to the crisis was international cooperation in recognising losses stemming from the eurozone and starting to rebuild from there.
“I don’t think any one country can get out of this easily on its own. It will require a great deal of international co-operation. And that is why it is very striking that our friends and colleagues in the United States spend so much time worrying about developments in the euro area.”
In the meantime, he insisted that the BoE had “not run out of road” with quantitative easing even if he accepted it might not be sufficient to build a self-sustaining recovery.
He also hoped that the new BoE and Treasury funding for lending scheme would soon become operable once it had received state aid clearance from Brussels.