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Broadbent Says Global Growth Creating Drag on U.K. Recovery

July 29 (Bloomberg) -- Ben Broadbent, deputy governor for monetary policy at the Bank of England, said a weak global environment will weigh on prospects for U.K. growth.

“If the global economy remains sluggish, it will inevitably be harder for an open economy like the U.K. to achieve both strong and balanced growth,” he said in a speech in London today. That partly explains why the BOE’s Monetary Policy Committee “expects U.K. output growth to soften a little over the future,” he said.

Gross domestic product expanded 0.8 percent in the second quarter, pushing output above its previous peak in 2008 and putting the U.K. on track to be the best-performing Group of Seven economy this year. While that’s focused attention on when the central bank will lift interest rates from a record low, BOE Governor Mark Carney said last week increases will be restrained because the economy faces “extraordinary forces.”

The global outlook is also a reason for the International Monetary Fund’s recent assessment that the pound is “modestly overvalued,” Broadbent said.

Sterling has appreciated more than 10 percent against the dollar in the past 12 months and was little changed at $1.6980 as of 8:40 a.m. London time. Even so, it’s below the 2007 peak of more than $2.

The devaluation of the currency due to the financial turmoil may have fueled a drop in imports that contributed to a recent narrowing of the trade gap, Broadbent said.

European Headwinds

The weaker pound partly means that overall, the U.K.’s overseas balance sheet “continued to perform relatively well” since the crisis started, he said. The struggle for Europe, Britain’s biggest trading partner, to make a sustained economic recovery has affected returns on U.K.’s overseas assets, he said.

“Weak growth in the U.K.’s trading partners, above all the euro area, has depressed interest and dividend receipts on foreign assets,” he said. “Equity prices have nonetheless risen everywhere, resulting in net capital gains on a balance sheet that’s slightly long risky assets.”

While there’s been a “sharp, and welcome, bounce in economic activity,” Britain’s current account deficit is the second-highest in the postwar period, he said. Though that’s been associated with past currency crises it doesn’t currently present “some independent, existential threat to U.K. growth.”

The credibility of the policy framework, put in place after Britain’s ejection from the Exchange Rate Mechanism and based on an inflation target, weighs against risks posed by a large current account gap, he said. Credibility “is something that should never be taken for granted,” he said.

To contact the reporter on this story: Jennifer Ryan in London at jryan13@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net Emma Charlton, Zoe Schneeweiss

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