Britain Could Return to Growth by MarchAndrew Grice and Sean O'Grady
A senior policymaker at the Bank of England has said the British economy should return to growth "within the next six to nine months", but warns that the "protracted" pace of recovery will not be enough to prevent unemployment rising "for some months yet".
David Miles, an external member of the Bank's Monetary Policy Committee, said: "We may get a couple of quarters pretty soon of very small increases in GDP. If you take that technical definition, we might be out of the recession in six or nine months."
But Mr Miles, echoing remarks made this week by the Bank's Governor, Mervyn King, warned that the difference between recovery and recession may not be noticeable to many people. "This is going to be a protracted period of a return to a more normal level of activity," he said. "If you ask the question, 'When will growth return to a level when, say, unemployment stops rising?' I fear that's a little bit further down the road and I think that's a more realistic definition of coming out of recession."
In a week when official unemployment rose to a 15-year high of almost 2.5 million, and the number of young people on the dole approached one million, Mr Miles said: "It is likely, unfortunately, that unemployment will continue rising for some months yet. There is already a substantial amount of slack. That degree of slack is likely to increase for some months yet."
Mr Miles gave little hint that the Bank is ready to reverse its unprecedented policy of cutting interest rates to 0.5 per cent – the lowest in the Bank's 315-year history – and its £175bn programme of quantitative easing, which is injecting money directly into the economy. Mr Miles said the amount of spare capacity in the economy meant there is very little inflationary pressure, implying rates could stay very low well into next year. The banks, added Mr Miles, will take "years" to fix, as they build up their capital and reserves of cash.
The latest survey of industrial trends by the CBI indicates a modest improvement in confidence and orders. But the CBI said that manufacturers' order books remained depressed last month, with demand for UK-made goods at home and abroad still very weak, and firms expecting little change in production in the coming quarter.
The Tories have seized on a warning from City analysts that "the prospect of a full-scale UK fiscal crisis is a clear and present danger". Because of the huge deficit in the public finances, Nomura International said such a crisis was "far more likely" in the UK than in the US. "The UK fiscal dynamics are unsustainable," it said. "The fiscal balance is plunging deeply into the red in a spectacular and frightening way. Who will fund it?"
George Osborne, the shadow Chancellor, said: "This worrying report should be a wake-up call. This is not just about whether Gordon Brown is telling the truth, this is about maintaining Britain's international reputation.
"We've already had one of the longest recessions of any major economy, and now Labour's policies risk soaring interest rates, further job losses and choking off the recovery."
Mr Miles hinted that the Bank's quantitative easing policy would continue until the economy staged a much more vigorous recovery, widely assumed to be unlikely before the end of next year, and that the Monetary Policy Committee would "revisit that issue [of extending QE] literally every single meeting".
A Cazenove spokesman said: "Temporarily, quantitative easing is masking the potential impact of massive government borrowing. Even so, the cost of interest on gilts held overseas is likely to top 1 per cent of GDP."
With Mr King, and one other member of the MPC, Mr Miles voted in August for an even larger increase in the programme than was eventually agreed.