New BoE chief will face slow recovery -King

LONDON Tue Nov 27, 2012 4:51pm GMT

Related Topics

LONDON (Reuters) - The Bank of England's outgoing governor Mervyn King underlined on Tuesday the uphill task his successor faces, saying the bank might have to buy even more government bonds to help drag Britain's economy back to health.

Finance minister George Osborne delivered a shock on Monday by appointing Canada's central bank head Mark Carney to be the first non-Briton to head the BoE, just over a week before he lays out the government's latest budget plans.

The euro zone debt crisis, high inflation and fiscal austerity have weighed heavily on economic recovery, which in turn has undermined the Conservative-led government's efforts to pay off the costs of the 2008 financial crisis.

While official numbers on Tuesday confirmed the UK economy grew 1 percent in the third quarter, King said his regime at the central bank should probably have made clear earlier that a substantial recovery would not come in 2013 and 2014.

"It may be unreasonable to expect anything other than a slow and protracted recovery, absent a further fall in the real exchange rate," King told a parliamentary committee.

"In such an environment, there are limits to the ability of domestic policy to stimulate private sector demand as the economy adjusts to a new equilibrium," he said.

"In the event that further easing is required, I believe it appropriate to continue with our policy of purchasing gilts."

Paul Fisher, a BoE policymaker speaking alongside King, said Britain's economy may well need more monetary easing next year.

Two other policymakers, Ben Broadbent and Martin Weale, said they might have backed more asset purchases in November had it not been for high inflation and a BoE transfer of money to the government that will provide about 35 billion pounds' stimulus.

Tuesday's official figures confirmed the country had exited recession. But the expansion was flattered by spending at the London Olympics and a rebound from the preceding quarter, when an extra public holiday dented output.

The Organisation for Economic Cooperation and Development struck a more pessimistic note, predicting on Tuesday that Britain's economy would shrink 0.1 percent this year and grow just 0.9 percent in 2013 - much weaker than its May forecast of 1.9 percent growth next year.

Economists said Carney, whose appointment was welcomed by financial markets on Monday, was likely to face an economy still struggling to return to solid growth when he takes over in July.

"I am completely confident with Mark Carney as someone with whom the Bank is in very good hands - as indeed is the role of governor which I am sure he will carry out with very great distinction," King said.

TROUBLE AHEAD

The downbeat growth predictions will raise the pressure on Osborne to come up with measures to boost the economy when he delivers his half-yearly budget statement next week.

Business surveys have painted a gloomy picture of the fourth quarter, and retail sales - a gauge of vital consumer spending - posted a surprise drop in October.

"The good news from the third quarter is unlikely to last," said Rob Wood, economist at Berenberg Bank. "With the one-off boost from the Olympics unwinding in the fourth quarter and business surveys downbeat, a return to contraction is likely."

Compared to a year ago, GDP was 0.1 percent lower, slightly worse than first thought, the Office for National Statistics said.

Consumer spending rose 0.6 percent on the quarter, the biggest increase in more than two years, driven by spending on recreation and culture, including tickets for the London Olympics and Paralympics which took place in the summer.

Britain's net trade position improved, with exports rising 1.7 percent on the quarter - partly due to spending by tourists - and imports dipping 0.4 percent, the ONS said.

Output in Britain's services sector, which makes up more than three quarters of GDP, rose by 1.3 percent in the third quarter - the largest increase in five years. It fell 0.1 percent in the second quarter.

Industrial output was 0.9 percent higher, while construction contracted by 2.6 percent.

Britain has not fully recovered the output lost in the wake of the financial crisis, while the euro zone's debt problems, government austerity to reduce the budget deficit and banks' reluctance to lend are holding back economic growth.

(Additional reporting by Peter Griffiths, Li-mei Hoang, Peter Schwartzstein and Natalie Huet.; Editing by Patrick Graham)

FILED UNDER:
We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (2)
DR9WX wrote:
There is a structural problem with the Government and Banking System. Without continuous growth, both will collapse. Continuous growth is not sustainable. Therefore, at some point, we won’t have growth and the Government and Banking System will collapse.

This is necessary but will be painful. We will then have a small Government that doesn’t deficit spend and sound money and a banking system that works how people already think it works.

The Financial System ended in 2008, we are in the transition stage.

Nov 27, 2012 4:25pm GMT  --  Report as abuse
DR9WX wrote:
But, would that make us competitive in a world awash with fiat currency?

Not just competitive, we would see amazing growth. Other countries would soon follow. The world would be a much better place.

A small group of powerful men would be upset. This has nearly happened twice. Both times in USA, Abe Lincoln and JFK both attempted this. Both were assassinated. How unlucky can the world be? The small group of powerful men retained their power. How lucky were they?

Nov 27, 2012 4:44pm GMT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.