Page last updated at 10:56 GMT, Wednesday, 22 October 2008 11:56 UK

Gloomy forecasts for UK economy

King: 'It now seems likely the UK economy is entering a recession'

The Bank of England governor and an influential think tank have predicted that the UK economy is likely to sink into recession in 2009.

Mervyn King told business leaders in Leeds he was concerned about rising unemployment and falling house prices.

Meanwhile, the National Institute of Economic and Social Research said the UK was on the brink of its first full year of recession since 1991.

Economic fears sent the pound plunging to a five-year low against the dollar.

In other signs of the widening economic crisis:

  • All nine members of the Bank of England's monetary policy committee voted for this month's half-point emergency cut in rates to 4.5% because of a "sharp deterioration" in the UK's economic prospects, according to minutes of the meeting. Further rate cuts next month are expected
  • European stock markets were jittery in mid-morning trading as fears of a global recession and further economic woe returned to haunt investors - London was down 2%, Paris was 2.3% lower and Frankfurt down 2.7%
  • Oil fell below $70 a barrel on worries the gloomy global economic outlook could limit the impact of any supply cuts that producers' cartel Opec might agree to at its meeting on Friday. Brent crude was down $2.62 at $67.10 a barrel. Opec says there will be a huge oversupply of oil next year if production continues at current rates
  • The pound fell to to $1.620 at one stage, its lowest level against the US dollar since September 2003, following Mervyn King's warning, while the euro and other high-yield currencies saw sharp falls. Further UK interest rate cuts would make sterling a less attractive investment than the dollar
  • Europe's banks have borrowed $72bn in short-term loans from the European Central Bank. The ECB has had to replace commercial banks to keep euro zone money markets functioning, as normal credit sources have dried up in the financial crisis
  • The Yorkshire Building Society is to take over its smaller rival, the Barnsley Building Society, in the latest deal among the UK's building societies resulting from the international financial crisis

The Bank of England has also been criticised for being too slow to cut interest rates in response to the UK's worsening economic climate.

[Mr King] would, I think, attract a large audience for his thoughts on how and whether the Bank of England can prevent the next credit binge and asset bubble
Robert Peston, BBC business editor

Sushil Wadhwani, a former member of its monetary policy committee, told the BBC: "The committee has been too slow to acknowledge the risks of a recession and they have fallen behind the curve.

"The consequence of their relative inactivity so far is that the recession is likely to be deeper and more prolonged than was necessary."

In its forecast, the NIESR predicted that Britain's economy would shrink by 0.9% in 2009, with consumer spending falling by 3.4%, business investment down by 3.8% and private housing investment 17.1% lower.

It also warned that if the government's 50bn banking bail-out did not succeed, the recession could be even deeper and longer.

"The British economy will suffer next year as it experiences the worst setback among the G7 countries," it said.

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The NIESR said its forecasts assumed that the Bank of England would cut interest rates to 4% early in 2009, although that would probably not be enough to bring inflation below its 2% target before the end of the year.

End of 'innocence'

Speaking on Tuesday night, Mr King said: "It now seems likely the UK is entering a recession."

He also said the British banking system had been closer to collapse earlier this month than at any time since the start of World War I.

Let me extend an invitation to the banking industry to join me in promoting the idea that a little more boredom would be no bad thing
Mervyn King, Bank of England governor

But he did try to inject a note of optimism, saying that the government's rescue package would now lead to a slow resumption of normal lending.

"We are far from the end of the road back to stability, but the plan to recapitalise our banking system, both here and abroad, will, I believe, come to be seen as the moment in the banking crisis of the past year when we turned the corner," he said.

Nevertheless, he said, the "age of innocence" of cheap lending between banks "will not quickly, if ever, return".

Moving on to inflation, the governor said there were welcome signs that it would come down from the "worryingly high rate" of 5.2% in September.

He said this was thanks to recent falls in energy prices back from the record highs of July.

While Mr King said the Bank of England was committed to bringing inflation back towards the government's 2% target, he more than hinted that there would be no rate rises for the foreseeable future.

DEFINING A RECESSION
A recession is widely accepted as a decline in a country's domestic economic output or GDP for at least two consecutive quarters

He said the Bank would continue to set rates "to meet the 2% inflation target, not next month, or the month after, but further ahead, when the impact of recent developments in both credit supply and world commodity prices will have worked their way through the economy".

Concluding his speech, Mr King said he hoped for quieter times ahead.

"I have said many times that successful monetary policy would appear to be rather boring.

"So let me extend an invitation to the banking industry to join me in promoting the idea that a little more boredom would be no bad thing."


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