UK already in a recession admits Bank and GDP could fall by 2%

13 November 2008 / by Rebecca Sargent
The strength of the UK economy became apparent yesterday as Bank of England chief Mervyn King confessed that 'it is very likely that the UK economy entered a recession in the second half of this year.'

And there is no quick fix for an economy that has already shrunk by 0.5 per cent and is expected to fall by two per cent overall, warned King.

A fall in GDP of two per cent may not seem much, but it has instilled fear in Brits who are already struggling to pay the mortgage and hold on to their jobs. According to The Times, a drop of between two and three per cent is the equivalent of £24billion less consumer spending, which would hit jobs further.

As a result of the Bank of England's grim predictions in its latest Inflation Report, the pound has fallen against the US Dollar to just $1.50. According to FairFX.com, a year ago, the pound was worth $2.11.

The financial pressure being felt by households across the UK has caused analysts to expect further Bank interest rate cuts to as low as one per cent. Inflation is now higher than five per cent, however, according to King it is expected to fall back to its target now the price of commodities like oil has come down, which could allow the Bank to further slash interest rates.

Commenting yesterday, Mervyn King said: "The outlook for inflation has changed substantially. But the Committee's approach to setting monetary policy has not."

As a means of damage limitation, on October 8th the Government took steps to recapitalise the banks after the banking system, according to King, "underwent the most severe episode of instability since the outbreak of World War 1."

However, according to experts, more is required to see the UK through the worsening recession and 'fiscal stimulus' in the form of tax cuts is expected to be announced in the pre-budget report later this month.

Commenting on the Inflation Report, chief economist at New Star, Simon Ward said: "Mr King appeared to welcome substantial fiscal loosening while playing down concerns about the plunge in exchange rate. However the commitment to maximum policy stimulus sits oddly with the Report's forecast of a relatively shallow and short recession.

"Markets may begin to worry about a loss of financial discipline."

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