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Bleak assessment for the British economy

Thu, May 15 2008, 13:11 GMT
by Benny Menashe

Finotec Group Inc.

Bank of England governor Mervyn King yesterday warned for the first time that the UK’s sharp slowdown in growth could send the country into recession. In the most downbeat assessment of the economy by the bank since Labour came to power in 19997, king warned that rising energy and import prices meant inflation could spike to 3.7 percent even if rates were not cut any further. King said the bank now expected growth to slump to 1per cent by the end of the year, compared to its 1.6 per cent projection just three months ago, and then rebound to 2.5 per cent growth by late 2009.

In stark contrast, the Treasury is still predicting growth of 2 per cent this year. “It is quite possible that we may get a quarter or two of negative growth,” King said. “Recession is not our central projection although clearly further shocks could push us in this direction.” In spite of this gloomy prognosis, the Bank indicated it would have little scope to cut interest rates. Its projections showed that a spike in inflation would be severe and persistent. King added: “We are travelling along a bumpy road as the economy rebalances. Monetary policy cannot, and should not try to, prevent that adjustment. “For the time being, at least, the nice decade is behind us,” he said. King who is obliged to write a letter of explanation to the Treasury if inflation hits 3.1 per cent, said he expected to write “a number” of such letters. GBP/USD currently trading at $1.9484 as of 7:50 am, GMT.

The U.S consumer price index came in with a surprise fall, in contrast to soaring UK consumer prices, US prices are on the way down with data yesterday showing prices edged lower. American consumer prices in April rose 3.9 per cent year-on-year, a decrease from March’s 4 per cent annual rate. Paul Ashworth, senior US economist at research house Capital Economics, said the data was a little better than expected. “But nothing to change the general outlook for inflation, which is very bad in the short-term and a little brighter in the medium-term,” he said. EUR/USD currently trading at $1.5530.

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Published on  Thu, May 15 2008, 13:24 GMT