Mervyn King: Recovery in sight

Nia Williams

February 13, 2013

King said: “Although output has been broadly flat for the past two years that masks a more encouraging underlying picture.”

King based his optimism on the steady growth of the services and manufacturing sectors, which grew by 1.2% over 2012, which he likened to the “headline” growth rate of 1.5% seen in the US.

And the weakness in overall output, which can largely be attributed to sharp falls in construction, are not expected to be repeated in 2013.

King added: “The UK economy is therefore set for a recovery.”

The “stubbornness” of inflation, which stayed at 2.7% this week, to remain above the Bank’s target of 2% has been attributed recently to increases in university tuition fees and domestic energy bills.

This is predicted to rise further in the near term, to around 3%, and may remain above the 2% target for the next two years.

After that time inflation is expected to fall back to levels closer to the target owing to a gradual recovery in productivity growth which will dampen increases in domestic costs and lessen external price pressures.

In the Quarterly Inflation Report, the Bank said UK banks’ funding costs have fallen further assisted by the improved financial environment and the Funding for Lending Scheme.

It said: “There is growing evidence that this is feeding into private sector credit conditions: many loan rates to households and companies have fallen and some measures of credit availability have improved.

“But it is still too early to know the extent to which this improvement in funding conditions will lead to an increase in net lending to the real economy, which remains flat.”

The Office of National Statistics released data on the labour market today which highlighted the effects of inflation on real wages.

Real wages peaked in 2009 and since then inflation has “outstripped” wage increases in cash terms.

Commenting on the ONS labour data, the Bank said: “Unemployment has edged lower, although it is still elevated. Labour market slack continues to bear down on pay growth which remains unusually weak.

“Nonetheless weak productivity growth means that companies’ unit labour costs have continued to rise faster than their average historical rate.”

In response to questions raised over recent decisions made by the Monetary Policy Committee King said: “You might be tempted to think that an above-target inflation forecast justifies a tighter monetary policy.

“Certainly ensuring that inflation returns to target in the medium term is our primary responsibility and objective.

“But the MPC’s remit is to deliver price stability in the medium termin a way that avoids undesirable volatility in output in the short run.”

He added: “Attempting to bring inflation back to target sooner would risk derailing the recovery and undershooting the target in the medium term.”

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