The chances of a sustained economic recovery in Britain depend crucially on events in the rest of the world, the Governor of the Bank of England, Mervyn King, has warned.
Speaking at the launch of the Bank's latest Inflation Report, its definitive view of the country's economic prospects, Mr King raised the spectre of protectionism to warn world leaders gathering in Seoul for the G20 summit of the need to reach agreement on a "gradual path" to resolve the currency and trade disputes that have flared violently in recent days.
Asked about the German finance minister's remark that the US Federal Reserve's $600bn (£374bn) injection into America's economy was "clueless", Mr King said he thought that there had been too many public interventions in recent days. However, he signalled his own differences with the US Treasury Secretary, Timothy Geithner, who has floated a cap of 4 per cent of gross domestic product for current account surpluses – aimed at China.
Mr King said: "It is very important that the fundamental point that is recognised at the weekend [will not be] decisions on instruments or exchange rates or targets for current account balances in terms of a number, but that there is a path along which the current account imbalances unwind. I hope that at the G20 meeting we will get a co-operative message rather than some of those that we have been getting in the last few days and weeks."
On a range of issues from house prices to private job creation and the possibility of a very sharp slowdown early next year as government spending cuts bite, Mr King offered an upbeat view. "The central view is clearly not that there will be a significantly sharp slowdown in growth from the last two quarters," he said.
The private sector, added Mr King, "can" generate enough jobs to prevent unemployment soaring. "Whether it will depends on many things which are not within our control and depend in part on the world economy. Yes, I am confident that it can," he said.
In words that may come back to haunt him, the Governor confessed that he did not see the real estate scene as being as "worrisome" as the IMF did.
Whatever his intentions, Mr King's view of the economic world is strikingly similar to the Treasury's. He admitted that members of the MPC may have a different view of fiscal policy, just as they differed on monetary policy. Some within the Bank are said to be privately critical that the Governor's support for the deficit reduction plan has blurred the Bank's political neutrality.
The Bank now thinks inflation will be higher during 2011 than previously thought – about 3.5 per cent in the first quarter of next year rather than the 3 per cent suggested in the August report. Mr King said that, had it not been for the rise in international commodity prices, the hikes in VAT this year and next, and the depreciation of sterling, inflation might well be heading for 1 per cent. It will be the first quarter of 2012 before it falls back below its 2 per cent target, and late 2011 for output to return to pre-recession levels.
The picture for growth was basically unchanged from the August Report – 2.5 per cent growth in GDP in 2012. This compares with the Office for Budget Responsibility's 2.3 per cent figure. However, the Bank's Inflation Report fan chart shows a large risk that the growth figure will be worse.