A stark warning of the continuing weakness of the economy came yesterday as the Bank of England announced a further dramatic expansion in its programme of quantitative easing, injecting money directly into the economy – to reach a total £200bn in the next few months. The Bank said "the prospect is for a slow recovery". The Governor, Mervyn King, said in a letter to the Chancellor that a "number of indicators of spending and confidence, however, suggest that a pickup in economic activity may soon be evident."
An additional £25bn was approved by the Bank's Monetary Policy Committee, less than the £50bn expected in some quarters: some £175bn has been expended since the policy was launched in March. At that point the Bank indicated that it thought £75bn might be sufficient to create more demand, avoid a slump and, in due course, bring inflation back to the official 2 per cent target. Interest rates were pegged for the ninth successive month at 0.5 per cent, their lowest in the Bank's 315-year history.
Although the latest figures on industrial production showed a partial bounce-back in September from a disastrously poor showing the previous month, the respected think-tank the National Institute for Economic and Social Research (NIESR) said that the economy shrank again in the three months to the end of October, and in October itself, following an official contraction of 0.4 per cent recorded by the Office for National Statistics (ONS) in the third quarter. The UK is the only nation in the G5 group of advanced economies to have not emerged from recession.
ONS figures on industrial output for September showed that although the 1.7 per cent monthly rise was bigger than expected, downward revisions to previous months meant that production fell by 0.8 per cent in the third quarter – worse than the 0.7 per cent drop that the ONS assumed in its preliminary GDP estimate. Jonathan Loynes, at Capital Economics, commented that "with production still down by more than 10 per cent on a year ago, the road to recovery in industry will be a long and bumpy one".
The NIESR has decided that the downturn is so severe as to warrant the description "depression", and says that "the profile of the economy suggests that the current depression is probably slightly worse than the experience of the early 1980s but not as bad as that of the early 1930s".
The Bank's move was welcomed by business, though they voiced concerns. One feature of QE is the way it has boosted capital markets and helped large companies to access finance, while households and smaller firms reliant on bank lending have seen less impact.
David Kern, the chief economist at the British Chambers of Commerce (BCC), said: "We are pleased with the decision to increase the QE programme, but disappointed that the MPC has not taken more specific measures aimed at stimulating bank lending to companies. It is important for the MPC and the Government to act decisively in order to unblock obstacles to bank lending. One critical factor delaying Britain's exit from recession is the difficulty smaller firms face obtaining adequate finance."
As finance ministers from the G20 prepare to meet at this weekend's summit at St Andrews, UK officials may be perturbed by remarks from the European Central Bank about "exit strategy" – with the danger that this will be implemented before the UK's recovery. The ECB said "looking ahead, not all our liquidity measures will be needed to the same extent as in the past", adding that it would phase out extraordinary measures "in a timely and gradual fashion".
May: £150bn "The timing and strength of recovery is highly uncertain."
August: £175bn "Recession appears to have been deeper than previously thought."
November: £200bn "The prospect is for a slow recovery in the level of economic activity." Bank of England explains its QE policiesReuse content