Britain Faces Long Road to RecoverySean O'Grady
The immediate prospects for Britain's economy are grimmer than in any previous forecast and output is unlikely to revert to pre-crisis levels before 2011, the Bank of England said in a stern warning yesterday.
Presenting the Bank's quarterly Inflation Report, the Governor, Mervyn King, was at pains to stress that, while the economy might soon return to modest growth, that was not necessarily a cause for "bunting and celebration".
The fall in GDP of about 6 per cent had been severe and the "prolonged period of balance-sheet adjustment" now beginning would hold back growth, Mr King said, adding that output was "unlikely, at least for a considerable period, to return to a level consistent with a continuation of its pre-crisis trend".
The economy, he said, had "only just started on the road to recovery" and the Bank believed that inflation was "on balance more likely to be below the target than above it for most of the forecast period, though by the end the risks are broadly balanced".
The report was issued as the Office for National Statistics announced an apparent stabilisation in the jobs market, with an official 30,000 rise in the unemployment figures for September, to 2.461 million. On the most up-to-date reading of the figures, the number of people out of work has actually fallen by a few thousands since July.
Inflation is likely to rise towards 3 per cent next year as VAT returns to 17.5 per cent and higher commodity prices feed through, before price increases again subside to 1 per cent.
Mr King promised that the Bank would "see through" such volatility – a sentiment welcomed by David Kern, the chief economist at the British Chambers of Commerce, who said: "It is important that legitimate worries over medium-term inflation risks do not become the trigger for an unduly early withdrawal of the quantitative easing programme. The risk of a double-dip recession remains serious."
However, the Bank did strike a more upbeat tone about longer-term growth prospects, boosted by its £200bn direct injection of money into the economy through quantitative easing (QE), a weaker pound and a stronger world economy. The shock 0.4 per cent drop in quarterly GDP between July and September might, said Mr King, be revised upwards by the ONS, but the "numbers speak for themselves".
The Bank forecasts growth will hit 4 per cent year-on-year in mid-2011 before easing to about 3 per cent in 2012. Overall, growth of about 2.1 per cent is the central forecast for 2010. Mr King said he kept "an open mind" about extending quantitative easing, remarks that pushed sterling sharply lower.
Most economists took the Bank's report and the Governor's comments as "doveish". Howard Archer, of Global Insight, said: "Further QE cannot be ruled out but is unlikely unless the economy suffers a major relapse in 2010. Any policy tightening remains a long way off and interest rates are likely to stay at 0.5 per cent until at least late-2010, and very possibly beyond."
Mr King chose to slap down the Conservative leader, David Cameron, who told his party conference that QE would "sometime soon have to stop because in the end printing money leads to inflation".
Mr King said that it was matter for the MPC under current arrangements. He added that "the need for a credible plan to ensure a substantial reduction in the fiscal deficit is now clear to everyone". However, the Governor refused to talk about his discussions with the Prime Minister.
The drought continues: Mortgage lending remains subdued
The Inflation Report's conclusion that the growth in loans to households "remained subdued" in recent months is confirmed by the latest figures from the Council of Mortgage Lenders. The CML said yesterday that the number of mortgages advanced to first-time buyers rose during September, after falling slightly in August.
Around 19,700 people bought their first home with a mortgage during the month, 5 per cent more than in August and 45 per cent more than in September last year, a time when the credit crunch threatened to make first time buyers extinct. But deposits and salary-multiples are still more demanding than in the bubble days of the 125 per cent mortgage.
First-time buyers are now routinely required to stump up average deposits of 25 per cent of their home's value, and banks are keeping a careful eye on their exposure. The average salary multiples that lenders advanced eased a little, from 3.1 times a borrower's income in August to 3.15 in September – the highest in a year, and a tentative sign that lenders are easing criteria slightly.
The CML said a third of first-time buyers avoided paying stamp duty in September as a result of the Government's stamp duty holiday on properties that cost up to £175,000. Stamp duty is scheduled to return to this sector of the market in the new year.