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17th Nov 2009
UK is moving out of recession, says MPC member
The UK economy is moving out of recession and into a recovery phase, according to Monetary Policy Committee member Dr Andrew Sentance.
In a speech given at Royal Holloway, University of London, last night Sentance - an external member of the Bank of England’s MPC - said that the latest figures on UK Gross Domestic Product were at odds with other economic data.
Sentance says that the latest data from the Organisation for Economic Co-operation and Development is actually pointing to a resumption of growth since the first half of the year, and that signs of recovery are stronger than those seen after the recession of the early 1990s.
He argues that there are four main elements backing the view that the UK is on the way towards economic recovery.
The first is signs of a broader global recovery, led by Asia, which is likely to help lift the UK out of the downturn.
A second encouraging indicator is an increase in confidence amongst businesses, documented by surveys from institutions such as the Confederation of British Industry.
A third positive area is the reported upturn in consumer spending and confidence, particularly in retail sales growth and as many consumers commit to major purchases such as cars and houses.
The final area where Sentance sees positive evidence of UK growth is in unemployment data, which shows that the pace of decline in the jobs market has eased dramatically in recent months.
But Sentance cautions that the UK is still in the early stages of returning to growth.
Although confidence is picking up among businesses and households, he says that this positive outlook is fragile.
The UK’s massive fiscal deficit - expected to be at least 10% of GDP this year - also presents a major obstacle to recovery.
Sentance also says that the margin between Bank base rate and LIBOR rates on which many banks base their lending on has narrowed over the last six months.
But he warns that the legacy of the financial crisis means that private spending will be slowed, as a result of the major adjustments the banking sector is having to go through.
On the continued low base rate environment and the impact of quantitative easing, Sentance says: “Over the last twelve months, there has been a strong headwind from the financial market and confidence shocks which rocked the world economy last autumn as the full force of the financial crisis became clear.
“So we can only properly assess the impact of policy stimulus as that headwind abates.”
Sentance predicts it will take about six to nine months before a change in interest rates begins to be filter through to demand and output.
He adds: “On the basis of these lags, the full impact of the big interest cuts we saw last autumn and winter will only just be coming through in the data.
“We have yet to see the potentially significant impact that quantitative easing could have on spending by households and firms, though the financial market effects we have seen so far do suggest that it is feeding through into asset prices and helping to ease funding conditions for businesses.”
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