UK economy will take a long time to heal

Wednesday 13th May 2009

The UK economy will need time to heal and it will take longer than anticipated to do so, the governor of the Bank of England warned today.

Mervyn King today stated, as the Bank launched its May Inflation Report, that "there is solid reason for supposing sustained recovery will take more time".

"The economy will eventually heal, but the process will be slow," Mr King said.

Mr King warned many uncertainties still remained - with the economy being held back by weak global demand, while the process of adjustment in the UK also continued as banks restructure.

"The whole point of the report is that many things can happen, and it is unwise for people to claim they know what the future will hold," the governor told reporters.

He hit out at anyone claiming to know what will happen in the coming year as being "deluded".

The Bank's Inflation Report points to GDP starting to turn in mid 2009 – but positive GDP growth coming in 2010.

However the balance of probabilities put the point of positive growth between late 2009 and 2012.

He warned the chances of output being higher in mid-2010 was no higher than output being lower.

"Growth has just as much chance as being positive as being negative," he said. "It is difficult to judge timings of return to historical growth rates.

"Yes, there are signals in the economy that pace of decline is moderating. The data are clearly showing that," Mr King said.

However, he warned there was "solid reason to believe for spending to increase to normal levels will take time. None of us knows the speed and the timing and the pace is very hard to judge.

"We don’t know what exactly will happen. There are many possible outcomes. There may well be growth over next year. Whether it will be sustained – I just don’t know."

In the Budget, the chancellor predicted a contraction of 3.5 per cent for 2009 and a rise of 1.25 per cent in 2010.

The Bank of England's figures put these in further doubt, and Mr King called on the Treasury to publish forecasts more fully as the central bank does.

If UK growth is below the Treasury's estimations, the government could be forced to borrow more.

"It was helpful the Budget was honest and open on scale of fiscal problems we are facing," Mr King said.

"There was really a very honest appraisal of fiscal position. We will need to move back to path of fiscal sustainability."

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