Recession could be looming warns BoE Governor

Mervyn King, the Bank of England’s Governor, has warned that the British economy faces recession.

According to Mr King, households are facing a protracted spending crunch as food and fuel bills continued to increase.

He added that financial strains would intensify the sharp economic downturn already taking hold and ruin chances for steep interest rate cuts to improve growth.

The assessment is the first from such a senior figure and Mr King quoted that it was ‘quite possible’ the economy would contract this year and early next.

Inflation has reached 3%, the performance on the high street is the weakest for 3 years and the fastest rise in unemployment for 2 years are all leading the first recession under New Labour.

The central projection is for a sharp slowdown of growth and it is quite possible that we may get a quarter or two of negative growth, explained Mr King. Recession is not our central projection although clearly further shocks could push us in this direction, he added.

The Bank of England is forecasting a slowdown in economic growth to around 1% while the Treasury projection of growth, announced by Chancellor Alistair Darling in the Budget, predicts growth of 2% this year and 2.5% next.

There is little chance of steep cuts in interest rates for the foreseeable future said Mr King due to the risk of fuelling price increases.

The Consumer Prices Index (CPI), the core measure of the cost of living, could stay above the target of 2% for at least two years believes the Bank.

The near-term outlook for inflation has deteriorated markedly over the last 3 months. CPI inflation was 3% in April, and rising energy and import prices will almost certainly push inflation up further, possibly significantly, in the coming months, said Mr King.

As those price increases filter through to household bills, they will lead to a squeeze on real take-home pay which will slow consumer spending and output growth, perhaps sharply, explained Mr King.

Finally, Mr King is warning that property prices will continue to decline this year but concluded by saying I don’t think anyone can say how much.

Gordon Brown, Prime Minister, said yesterday that Britain would emerge from the global slowdown stronger and better, both as a country and a Government.

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