BoE sounds negative note on UK economy

In the Bank of England’s quarterly Inflation Report Mervyn King warned that although the worst of the recession may now be behind the UK, the recovery will be protracted. Bank lending, key to any recovery, is likely to remain muted as the industry rebuild its balance sheet and consumers, too, are focused on paying off their debts.

King said "I don't think it's unrealistic to suppose that growth rates come back but that doesn't mean that, as far as most people and most companies are concerned, the recession will feel as if it is over."

He fell in line with the government's view that the downturn will have ended this summer, with growth set to begin again next January. On inflation, King predicted it would stay below the target of two per cent for the next three years, surprising investors, who had expected interest rates to rise more quickly.

The Governor's remarks came in the wake of an unemployment report showing that 2.4m people in the UK were without a job in June. The number of employed workers saw its biggest quarterly drop since records began and the jobless rate rose to 7.8 per cent, its highest level in 13 years. The numbers illustrated just how difficult any recovery will be.

Later in the US the Federal Reserve said the worst of its recession is over and in Germany and France too the recession has come to an end with positive growth of 0.3 per cent in the second quarter.

WHAT THEY ARE SAYING:

James Moore in the Independent: "It is hard to see anything as good news when a jobless total of 2.43 million is announced, but the fact is that this was a shade better than expected. Mr King's comments could also be seen as relatively optimistic. He is, after all, a central banker and a dour old stick at the best of times, so it is unlikely he would be spreading happiness and joy, even if the economy were going like a train (and it's going to be an awful long time before it does that)."

David Wighton in the Times: "The recession has been deeper than expected. This has created an enormous amount of slack in the system, pushing concerns about the threat of resurgent inflation further out.The good news is that this will allow the Bank to keep interest rates very low for longer...The bad news about the Bank’s view on the output gap left by the recession is that the economy needs to recover further before unemployment stops rising."