London: Bank of England policymaker Paul Fisher said on Thursday Britain could quite easily suffer another recession and that more asset purchases might be needed after the current round is completed.
Although Britain’s last recession ended in mid-2009, the economy has barely grown over the last 12 months. Unemployment has started to rise again and consumers are cutting spending as soaring prices, higher taxes and slow wage increases hit their pockets.
Paul Fisher, markets director of the Bank of England. Photo: Bloomberg.
Fisher, the central bank’s executive director for markets, said that a new recession could not be ruled out.
“I think it is a significant chance. Looking at Q4 for example, at best it seems likely to be flat, could easily have negative growth, so the technical outcome of two quarters of negative growth in a row could quite easily come about,” he said in an interview with Bloomberg TV.
Fisher’s fellow policymaker Adam Posen, who had been lobbying for more quantitative easing for the past year, also struck a downbeat tone on the economy.
“I’m glad the committee has decided to recognise the British economy is cratering and we have a responsibility to do something about it,” Posen told the Independent newspaper in an interview, adding that growth was set to remain very weak.
“I’m saying roughly 0.5% or below for 2011 and 0.5% or above for 2012,” he said, giving a forecast that is well below the average prediction of 1.0% growth for this year and 1.3% for next in a Reuters poll.
A survey among retailers from the Confederation of British Industry highlighted the weakness in consumption as retail sales in October continued to fall albeit at a slightly slower pace than in the previous months.
The central bank has launched a second round of asset purchases worth £75 billion to try to stimulate growth. It has also kept interest rates at a record low of 0.5%, where they have stood since March 2009.
“It takes some time to purchase these large scales of assets, so we think the four months running up to February is a sensible period of time to buy 75 billion,” Fisher said.
“And when we get to that point we can stop and see whether or not we think we need to go further.”
Fisher said in a separate text interview with Bloomberg that he had voted for £75 billion because he was sure that the bank would have to do “at least” 75 billion of easing.
The BoE justifies QE on the basis that inflation has probably already peaked at September’s three-year high of 5.2%, and that without QE it is likely to undershoot its 2% target in the medium term due to weaker global growth.
Like governor Mervyn King and other BoE policymakers before, Fisher said inflation should fall back significantly early next year when one-off factors like an increase in value-added tax fall out of the equation.
“We were previously forecasting inflation to fall back on the central projection somewhere between 1.5% and 2%, looking 2 or 3 years ahead,” Fisher said. “It is likely that without building in the effect from restarting the asset purchase program, we would have had a significantly lower inflation forecast.”
While noting the uncertainties for the outlook, Fisher saw the biggest danger in inflation falling too far. “The big risk for us is that a significantly weak economy would push us back into deflation and that’s the really tricky problem to get out of once you get there,” he said.
With the government’s hands tied by its pledge to erase a budget deficit of some 10% over the next 5 years, the onus to boost growth has been on the BoE.
“I think that the overall combination of a tight fiscal policy and loose monetary policy is the right one for the country at the moment,” Fisher said.
The BoE policymaker said Britain was viewed as a safe haven by investors. “If people did not have confidence in the UK, you would not see gilt yields as low,” Fisher said. “I take some comfort from the stability of sterling.”
Fisher also said that Britain’s banks were in a better position than a year or two ago to weather the risks stemming from the euro debt crisis.
“They’ve got big improvements in their capital base, big improvements in their liquidity; they’ve been deleveraging their balance sheets,” he said.