Bank offers little hope of recovery

THE Bank of England yesterday offered little prospect of a discernible economic recovery but mounted a strong defence of sterling's membership of the European exchange rate mechanism.

In its latest Quarterly Bulletin, the Bank said the outlook remained 'very uncertain' but added: 'Slow growth in the economy should be evident during the remainder of this year.' The Bank thinks that official figures for national output in the second quarter, released today, should reveal that, excluding North Sea oil production, the fall in output has ceased for the first time since the recession began in the third quarter of 1990.

However, release of the Bulletin coincided with the Bundesbank's latest monthly report, which implied it would be some time before German interest rates were reduced. It said that inflationary pressures had barely changed, and that any early easing would merely worsen price prospects.

The Bank of England said the critical ingredient for recovery - higher consumption - was still missing. Consumers were not conforming to the pattern of previous recessions when an upturn in consumption had been more easy to predict. 'It seems increasingly likely that significant numbers of people are saving more as they attempt to repay some of the large amounts of debt accumulated in the late 1980s.' For the moment, the Bank said, 'the post-election recovery in consumer demand has proved fragile with no clear sign as yet that demand is moving above last year's depressed level'.

In addition, export growth has been erratic, which cast further doubts over recovery prospects.

On the world scene, the Bank said the slow pace of recovery was also cause for concern. It forecast that for the Group of Seven leading industrial countries as a whole, output in 1992 was likely to be just 1 3/4 per cent higher than in 1991.

Like the Treasury, the Bank believes the atmosphere of gloom and doom has been overdone, and is not justified by the latest figures. These offer no grounds for a radical change of strategy, such as abandoning the ERM.

After the bruising 1980s experience of trying to subdue inflation by imposing money supply growth targets only to jettison them later on, the Bank was adamant that the current anchor for anti-inflationary policies should be maintained.

Moreover, uncertainties over European monetary union following the Danish rejection of the Maastricht treaty 'demonstrate the importance of maintaining the clarity of the domestic objectives of policy' embodied in ERM membership. 'That credibility should not be placed in jeopardy.'

With the key uncertainty a revival of consumption, the Bank underlined that the 750,000 to 1 million households whose properties were worth less than their mortgages meant 'the pattern of high personal saving and slow growth of consumer spending could persist for some time'.

The Bank noted a small rise in business spending in the first quarter. But it warned that if this trend were to be sustained consumer spending and export growth would have to pick up.

An outside chance that the Bundesbank might raise its key Lombard interest rate tomorrow put the dollar and pound under pressure. Sterling closed 0.41 pfennigs lower at DM2.8132, a new 27-month low, while the dollar shed 0.6 pfennigs to close at DM1.4567.

Angus Armstrong, international economist at Morgan Grenfell, said the Bundesbank was unlikely to raise rates tomorrow, but was maintaining tight money market conditions to signal an early cut was not in prospect.

Economic gloom also hit share prices, with the FT-SE index of 100 leading shares falling 21.4 points to 2,354.7.

In a further sign of continuing recession, the Government had to borrow an unexpectedly large pounds 562m last month to meet the shortfall between spending and revenues, despite a pounds 1.7bn windfall from the sale of BT shares.

The Government has amassed a public sector borrowing requirement of pounds 11.3bn in the first four months of the financial year, the Treasury said yesterday. This was nearly twice the figure at the same stage last year.

The public finances have been driven deeper into the red as the recession has hit tax revenues and increased spending on unemployment and other social security benefits. The Chancellor forecast a pounds 28bn PSBR for 1992-3 in the Budget, but City economists think the figure is likely to be closer to pounds 32bn.

Personal bankruptcies increased by 30 per cent, to 16,180, between the second half of last year and the first half of this year, while compulsory and creditors' voluntary liquidations increased by 11 per cent to 12,014, KPMG Peat Marwick said.