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Prospects for recovery
Mervyn's reality check
Aug 13th 2009
From The Economist print edition
The Bank of England foresees better times but remains wary
Illustration by David Simonds
FOR much of this summer, a recovery has shimmered on the horizon only to turn out to be a mirage. Now
a genuine revival in Britain’s swooning economy does look in sight. But it will bring scant comfort to
anyone hoping for a swift return to business as usual.
That, in effect, was the unpalatable message delivered by the Bank of England on August 12th in its
quarterly review of the economy. Presenting the findings of the Inflation Report, Mervyn King, the bank’s
governor, said it was likely that output had stabilised in the middle of this year. The bank was now more
confident that the economy would pick up in the near future. But he gave warning that “recovery could be
slow and protracted.”
That recovery should be supported in the initial stages by a turnaround in the stock cycle, as producers
start to meet demand by raising output rather than running down inventories. The fall in the pound will
also help. Although sterling has bounced back quite a bit since its nadir at the end of last year, the tradeweighted
index is still 20% lower than in the first half of 2007, before the financial crisis began. That
should give British producers of tradable goods and services a competitive edge both at home and in
foreign markets. More generally, the economy is being boosted by the extraordinary stimulus it is getting
from monetary and fiscal policy.
But the recovery will be from a lower starting-point than the Bank of England envisaged in May, reflecting
the dismal performance of the economy in the first half of the year (see chart 1). On the other hand, it will
be somewhat stronger thanks to the bank’s decision on August 6th to extend yet further its unorthodox
policy of quantitative easing. It will purchase a further £50 billion ($83 billion) of assets with newly
created money over the next three months, taking the total to £175 billion.
Moreover, the bank used the occasion to send a signal that it
would be in no hurry to raise the base rate, which it brought down
to an all-time low of 0.5% in March. The report presents
projections for inflation on two different assumptions, the interest
rates expected by the markets and the base rate being left
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