THURSDAY AUGUST 09 2001

Hard times ahead, says gloomy Bank

BY LEA PATERSON, ECONOMICS EDITOR

BRITAIN’s economy faces a grim 12 months, with growth slowing and unemployment rising as businesses struggle to cope with the worldwide slump in demand, the Bank of England has said. In a gloomy assessment of UK prospects that has paved the way for further cuts in interest rates, the Bank slashed its forecasts for growth this year and said that the economy would struggle to stage a strong recovery in 2002.

The Bank predicted that the economy would fail to meet the Government’s forecasts for the year, with growth slowing to just 2 per cent — half a point below the Treasury’s projection. That would be the weakest annual performance for a decade, and the Bank said that growth could be lower still if the global economy continued to deteriorate.

Mervyn King, Deputy Governor, said that the chances of overall recession remained low. He gave warning, however, that, with the gap between gloom-ridden manufacturing and the buoyant services sector at its widest for a generation, the economy was set for a rough ride.

“The probability that, over a 12-month period, output will be lower at the end of the year than at the beginning is very small, but I can’t pretend we can wave a magic wand and magically insulate the UK from what is going on in the world economy,” he said.

Mr King said that the Monetary Policy Committee had agonised over last week’s surprise quarter-point cut in interest rates, and was painfully aware that the reduction in borrowing costs could stoke the housing market boom.

Concerns about the buoyancy of the consumer sector were underlined by Bank figures showing that households have added £55 billion to their debt in the past year, taking overall debt to a record £691.5 billion.

“No one pretended that the decision was easy,” Mr King said. “To cut rates would run the risk of overstimulating consumption, and exacerbate the size of the adjustment that will ultimately be required.”

It was, however, a risk worth taking, he said. “To fail to cut would run the risk of undershooting the inflation target and unnecessarily depress activity.”

The Bank blamed weakening world demand, and particularly the worsening slowdown in Europe, for its pessimism. It indicated that unemployment was likely to rise in the months ahead.

The City interpreted the Bank’s downbeat assessment of economic prospects as a clear signal that borrowing costs were likely to fall again. “The strong message from the August Inflation Report is that the door is open to further falls in interest rates over the coming months,” Jonathan Loynes of Capital Economics said. “We stick to our view that rates will fall to 4.5 per cent (compared with their current level of 5 per cent) by the end of the year.”

Other analysts argued, however, that the Bank had failed to fully take into account the impact on inflation of this year’s four cuts in rates, and this could limit the scope for manoeuvre. “The MPC’s interest rate policy remains a high-risk bet on a rapid slowdown in consumer demand,” Richard Iley of the investment bank ABN Amro said.

Business groups said that the weakening world economy justified further cuts in interest rates later in the year. “The Bank should have the scope to cut interest rates further, and should aggressively use every opportunity,” Ian Fletcher, chief economist at the British Chambers of Commerce, said.

The Bank’s assessment came as BOC, the gas specialist, said that it would cut 1,500 jobs worldwide. As many as 200 UK jobs may be lost.

http://www.thetimes.co.uk/article/0,,2-2001273182,00.html

-- Martin Thompson (mthom1927@aol.com), August 09, 2001

Answers

Response to BRITAINÂ’s economy faces a grim 12 months

Gosh, the Brits should have started cutting interest rates a long time ago. Their late start portends nothing but future, near term at least, misery.

-- Big Cheese (bigcheese@multimax.net), August 09, 2001.