The economy is now on the verge of recession, the Bank of England has warned for the first time. In his gravest assessment yet, Governor Mervyn King said the economy will start to shrink by the end of the year, the first decline since the early 1990s.
He warned that households face an “extremely difficult” year ahead as Britain is hit by rising energy and oil prices and the worst financial crisis '“since the Second World War”.
Setting out a gloomy diagnosis of the problems facing families, Mr King also warned that:
· Inflation will rise to 5 per cent or above - the highest level in 16 years - ruling out an immediate cut in interest rates.
· House prices will continue to fall in the coming months, despite already suffering the biggest drops in recorded history.
· Thousands more workers will lose their jobs as struggling firms cut back on staff. .
Mr King’s comments came as new figures showed unemployment rising at fastest rate since the last recession. The number of people out of work jumped by 60,000 in the three months to June - taking the total to 1.67 million.
And following his forecast, the pound plunged to its weakest level against foreign currencies since 1996.Presenting the Bank’s Inflation Report- its key quarterly examination of the economy - Mr King said: “There is a feeling of chill in the economic air.”
He slashed his forecast for the UK’s growth, acknowledging that by the end of this year the economy will be shrinking rather than expanding.
This last happened in 1992, when Britain was in the midst of a major recession. The Governor added that a technical recession - defined as the economy shrinking for two successive quarters - was more than possible.
“It is bound to be the case there will be a quarter or two of negative growth,” he said. “Oil prices are at the highest level in real terms at any point in the post-war period apart from the late 1970s, and we’ve also seen the biggest financial dislocation since the Second World War.
“What is unique about the present set of circumstances is that both shocks have happened at the same time, and the combination has meant that life is extremely difficult, and will be for the UK economy over the next year.”
He said that families’ disposable incomes - the most comprehensive measure of their standard of living - would shrink in the coming year as rising prices and the growing tax burden ate deep into households’ wages.
The warning is his most bleak yet, and follows a stream of negative economic news. House prices are now falling at the fastest rate since comparable records began, according to recent statistics. The ONS also announced this week that the Consumer Prices Index rose by 4.4 per cent in the year to July - the highest rate since 1992 and double the Bank’s 2pc target.
Mr King insisted that although the next few years would be difficult, they would not be as painful as the early 1990s, when millions of families faced negative equity and a million people lost their jobs.
He also predicted that after two tough years the economy, and eventually the housing market, will recover their strength. Mr King’s forecast today also leaves Alistair Darling’s own projections for strong economic growth both this year and next looking effectively hopeless.
The Chancellor is likely to have to slash his forecasts by more than any of his predecessors in recent memory at the Pre-Budget Report in the autumn.
Following the Governor’s comments, Mr Darling said: “As both the Government and the Bank of England have recognised, the UK, like other economies, is seeing the consequences of globally high energy and food prices.
We know the impact that this is having on people here and will continue to support families and business through these tougher times.”
The Government is considering a number of emergency measures to help arrest the slump in the housing market, including a stamp duty holiday and a scheme for local authorities to buy up billions of pounds worth of unsold homes.
However, with it yet to decide on the best measures, the Chancellor and Gordon Brown have been accused of negligence in their custody of the economy.
Liberal Democrat Treasury spokesman Vince Cable said: “This report gives added authority to other forecasts which suggest next year will be truly dreadful. With no growth and inflation running higher than at present levels, we can expect to see a squeeze on living standards and rising unemployment.
“The Bank of England is undoubtedly right to hold out the prospect of improved conditions in two years time, providing that interest rate discipline is maintained.
“However, it is very difficult to see how a weakening government with minimal political authority is going to stagger though next year, when economic conditions are deteriorating. This report reads like an obituary for Gordon Brown’s economic credibility.”
Mr King said although the slowdown was painful, comparisons with the early 1990s - regarded as the worst housing crash in living memory, were not appropriate.
“I don’t think we’re facing anything like the sorts of circumstances which led households [back then] to find it very difficult to service their mortgage payments,” he said.
“In that respect we are not in the same position as we were before. Though we are clearly seeing a significant adjustment to house prices.”
By Edmund Conway Economics Editor
Last Updated: 9:52pm BST 13/08/2008
He warned that households face an “extremely difficult” year ahead as Britain is hit by rising energy and oil prices and the worst financial crisis '“since the Second World War”.
Setting out a gloomy diagnosis of the problems facing families, Mr King also warned that:
· Inflation will rise to 5 per cent or above - the highest level in 16 years - ruling out an immediate cut in interest rates.
· House prices will continue to fall in the coming months, despite already suffering the biggest drops in recorded history.
· Thousands more workers will lose their jobs as struggling firms cut back on staff. .
Mr King’s comments came as new figures showed unemployment rising at fastest rate since the last recession. The number of people out of work jumped by 60,000 in the three months to June - taking the total to 1.67 million.
And following his forecast, the pound plunged to its weakest level against foreign currencies since 1996.Presenting the Bank’s Inflation Report- its key quarterly examination of the economy - Mr King said: “There is a feeling of chill in the economic air.”
He slashed his forecast for the UK’s growth, acknowledging that by the end of this year the economy will be shrinking rather than expanding.
This last happened in 1992, when Britain was in the midst of a major recession. The Governor added that a technical recession - defined as the economy shrinking for two successive quarters - was more than possible.
“It is bound to be the case there will be a quarter or two of negative growth,” he said. “Oil prices are at the highest level in real terms at any point in the post-war period apart from the late 1970s, and we’ve also seen the biggest financial dislocation since the Second World War.
“What is unique about the present set of circumstances is that both shocks have happened at the same time, and the combination has meant that life is extremely difficult, and will be for the UK economy over the next year.”
He said that families’ disposable incomes - the most comprehensive measure of their standard of living - would shrink in the coming year as rising prices and the growing tax burden ate deep into households’ wages.
The warning is his most bleak yet, and follows a stream of negative economic news. House prices are now falling at the fastest rate since comparable records began, according to recent statistics. The ONS also announced this week that the Consumer Prices Index rose by 4.4 per cent in the year to July - the highest rate since 1992 and double the Bank’s 2pc target.
Mr King insisted that although the next few years would be difficult, they would not be as painful as the early 1990s, when millions of families faced negative equity and a million people lost their jobs.
He also predicted that after two tough years the economy, and eventually the housing market, will recover their strength. Mr King’s forecast today also leaves Alistair Darling’s own projections for strong economic growth both this year and next looking effectively hopeless.
The Chancellor is likely to have to slash his forecasts by more than any of his predecessors in recent memory at the Pre-Budget Report in the autumn.
Following the Governor’s comments, Mr Darling said: “As both the Government and the Bank of England have recognised, the UK, like other economies, is seeing the consequences of globally high energy and food prices.
We know the impact that this is having on people here and will continue to support families and business through these tougher times.”
The Government is considering a number of emergency measures to help arrest the slump in the housing market, including a stamp duty holiday and a scheme for local authorities to buy up billions of pounds worth of unsold homes.
However, with it yet to decide on the best measures, the Chancellor and Gordon Brown have been accused of negligence in their custody of the economy.
Liberal Democrat Treasury spokesman Vince Cable said: “This report gives added authority to other forecasts which suggest next year will be truly dreadful. With no growth and inflation running higher than at present levels, we can expect to see a squeeze on living standards and rising unemployment.
“The Bank of England is undoubtedly right to hold out the prospect of improved conditions in two years time, providing that interest rate discipline is maintained.
“However, it is very difficult to see how a weakening government with minimal political authority is going to stagger though next year, when economic conditions are deteriorating. This report reads like an obituary for Gordon Brown’s economic credibility.”
Mr King said although the slowdown was painful, comparisons with the early 1990s - regarded as the worst housing crash in living memory, were not appropriate.
“I don’t think we’re facing anything like the sorts of circumstances which led households [back then] to find it very difficult to service their mortgage payments,” he said.
“In that respect we are not in the same position as we were before. Though we are clearly seeing a significant adjustment to house prices.”
By Edmund Conway Economics Editor
Last Updated: 9:52pm BST 13/08/2008
