Bank of England governor Sir Mervyn King has warned that the UK’s path to recovery will be “arduous, long and uneven” as it looks to tackle the steepest downturn in output since the 1930s.
At a speech in Brighton yesterday, King said that rebalancing the world economy, and the UK within it, is not proving to be a smooth process, but it remains necessary.
He said: “After many years in which the stock of debt built up rapidly, there has been a reappraisal. A reappraisal by markets of the strength of banks, by consumers of their income prospects, by lenders of the likelihood that debts will be repaid, by investors of the value of assets, and by markets of the value of currencies.”
King said that while the fall of inflation is good news as it will “relieve the squeeze on real income growth and the pressure on consumer spending”, he warns that does not mean 2012 will be an easy year.
King said that in addition to the sharp squeeze in real take home pay, three factors will continue to impact the economy in 2012: tight credit conditions, higher household saving and the dark clouds hanging over the world economy.
He said: “The common thread linking them is that each is a symptom of the debt hangover that followed from the overextension of balance sheets in the run-up to the financial crisis. The continuing need for banks, households and nations to reduce their indebtedness is part of the broader story of the unwinding of the imbalances in the world economy as a whole.”
King said there was scope for the Bank of England to act thanks to falling inflation and lower wage growth.
He said: “There there is scope for interest rates to remain low, and, if necessary, for further asset purchases, to prevent inflation falling below the 2 per cent target.
King has also called for the UK to rebalance its economy in order to tackle its rate of borrowing.
He said: “The United Kingdom is still borrowing from the rest of the world. If, as a nation, we are to reduce that borrowing, we must export more and import less.”