Mervyn King: I see trouble ahead

Bank of England Governor's dire warning on state of the economy

A year of economic growth and faltering recovery ground to a halt as the economy shrank during the last three months of 2010, according to official data released yesterday.

The news was greeted as "shocking", "dire" and "terrible" by economists, particularly as it comes at a time when inflation is set to accelerate, threatening a return to the "stagflation" of the 1970s.

In a speech in Newcastle, the Governor of the Bank of England, Mervyn King, gave warning that inflation would rise to "uncomfortably high" levels this year – peaking at "between 4 per cent and 5 per cent" before "falling back" next year. Mr King also said that unless there was pay restraint, interest rates would quickly be raised.

The Office for National Statistics (ONS) said that most of the 0.5 per cent fall in output recorded between October and December was down to the extreme weather in the final weeks of the year – but that still implies an otherwise "flattish" economy unable to grow, and is way below expectations of continuing, albeit modest, growth.

The figures, described by the Chancellor George Osborne as "disappointing", raise fears of a "double-dip" recession which would be bad news for jobs, the public finances and the housing market. The news also sent sterling and the stock market tumbling yesterday.

Mr Osborne was, however, quick to reject any notion of a U-turn in economic policy. "These are obviously disappointing numbers, but the ONS has made it very clear that the fall in GDP was driven by the terrible weather in December," he said. "There is no question of changing a fiscal plan that has established international credibility on the back of one very cold month. That would plunge Britain back into a financial crisis. We will not be blown off course by bad weather," he added.

Ed Miliband, the Labour leader, said the growth figures were "worrying". "George Osborne is using the British Rail excuse: the wrong type of weather," said Mr Miliband. "Even without that, the economy would be flat. What worries me is that these figures relate to the period before the vast majority of the spending cuts and before the VAT rise. The Government thinks the answer is to reduce the deficit and everything will be fine. The problem is that it has made decisions that are not about growth but inhibit growth." However, he stopped short of predicting a double-dip recession.

Ed Balls, making his debut as shadow Chancellor, added: "Now we are seeing the first signs of what the Conservative-led Government's decisions are having on the economy. Cuts which go too far and too fast will damage our economy. And shrinking growth and rising unemployment is not only bad news for families, but will actually make it more difficult to get the deficit down."

The implication that inflation will not return to its 2 per cent target until well into 2012 will disturb the City. Such inflationary trends are much higher than the Bank has forecast and will lead to mounting pressure on the Bank's Monetary Policy Committee (MPC) to raise interest rates. Mr King said that the nation faced a "squeeze in living standards". In a speech that suggested no early rise in rates and mortgage bills, Mr King stressed how much of the current inflation has been caused by the increase in VAT and booming global commodity prices.

He would not, he said, be influenced by adverse headlines about inflation, but cautioned that inflationary pay rises would be met with swift action.

"Further rises in world commodity prices and energy prices cannot be ruled out, and attempts to resist their implications for real take-home pay by pushing up wages would require a response by the MPC," Mr King said.

Nonetheless, analysts said an early base-rate rise was unlikely. Chris Redfern, a senior dealer at Moneycorp, commented: "The markets certainly shivered as the UK took its first step back towards a double-dip recession. It is possible this dip will remain a one-off occurrence. However, the figure will impact on the likelihood of a rate hike, and it is unlikely that the Bank of England will raise interest rates now before the third quarter of the year."

The experts' views

"Dire" David Buik, BGC Partners

"Shockingly bad" John Hawksworth, chief economist at PwC

"Astonishingly poor" John Philpott, chief economic adviser at the Chartered Institute of Personnel and Development

"Staggeringly weak" Stuart Green, chief UK economist, HSBC

"Stunningly bad" Howard Archer, chief economist, Global Insight

"Exceptionally bad" Douglas McWilliams, Centre for Economics and Business Research

"Bolt from the blue" Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club

"A terrible reading" Alan Clarke, UK economist, BNP Paribas

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Claims Administrator

£16000 - £18000 per annum: Recruitment Genius: A position has arisen within th...

Ashdown Group: Development Manager - Rickmansworth - £55k +15% bonus

£50000 - £63000 per annum + excellent benefits : Ashdown Group: IT Manager / D...

Recruitment Genius: Security Officer

£16500 per annum: Recruitment Genius: Applicants must hold a valid SIA Door Su...

Ashdown Group: Business Analyst - City, London

£50000 per annum: Ashdown Group: Business Analyst - Financial Services - The C...

Day In a Page

The saffron censorship that governs India: Why national pride and religious sentiment trump freedom of expression

The saffron censorship that governs India

Zareer Masani reveals why national pride and religious sentiment trump freedom of expression
Prince Charles' 'black spider' letters to be published 'within weeks'

Prince Charles' 'black spider' letters to be published 'within weeks'

Supreme Court rules Dominic Grieve's ministerial veto was invalid
Distressed Zayn Malik fans are cutting themselves - how did fandom get so dark?

How did fandom get so dark?

Grief over Zayn Malik's exit from One Direction seemed amusing until stories of mass 'cutting' emerged. Experts tell Gillian Orr the distress is real, and the girls need support
The galaxy collisions that shed light on unseen parallel Universe

The cosmic collisions that have shed light on unseen parallel Universe

Dark matter study gives scientists insight into mystery of space
The Swedes are adding a gender-neutral pronoun to their dictionary

Swedes introduce gender-neutral pronoun

Why, asks Simon Usborne, must English still struggle awkwardly with the likes of 's/he' and 'they'?
Disney's mega money-making formula: 'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan

Disney's mega money-making formula

'Human' remakes of cartoon classics are part of a lucrative, long-term creative plan
Lobster has gone mainstream with supermarket bargains for £10 or less - but is it any good?

Lobster has gone mainstream

Anthea Gerrie, raised on meaty specimens from the waters around Maine, reveals how to cook up an affordable feast
Easter 2015: 14 best decorations

14 best Easter decorations

Get into the Easter spirit with our pick of accessories, ornaments and tableware
Paul Scholes column: Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season

Paul Scholes column

Gareth Bale would be a perfect fit at Manchester United and could turn them into serious title contenders next season
Inside the Kansas greenhouses where Monsanto is 'playing God' with the future of the planet

The future of GM

The greenhouses where Monsanto 'plays God' with the future of the planet
Britain's mild winters could be numbered: why global warming is leaving UK chillier

Britain's mild winters could be numbered

Gulf Stream is slowing down faster than ever, scientists say
Government gives £250,000 to Independent appeal

Government gives £250,000 to Independent appeal

Donation brings total raised by Homeless Veterans campaign to at least £1.25m
Oh dear, the most borrowed book at Bank of England library doesn't inspire confidence

The most borrowed book at Bank of England library? Oh dear

The book's fifth edition is used for Edexcel exams
Cowslips vs honeysuckle: The hunt for the UK’s favourite wildflower

Cowslips vs honeysuckle

It's the hunt for UK’s favourite wildflower
Child abuse scandal: Did a botched blackmail attempt by South African intelligence help Cyril Smith escape justice?

Did a botched blackmail attempt help Cyril Smith escape justice?

A fresh twist reveals the Liberal MP was targeted by the notorious South African intelligence agency Boss