King Backs Cameron Budget Plan As BOE Lowers Outlook: Economy
By Jennifer Ryan and Scott Hamilton - Aug 8, 2012 
Bank of England Governor Mervyn King signalled continued support for Prime Minister David Cameron’s budget squeeze as he cut forecasts for economic growth and said Britain’s recovery will be a “slow process.”
“If you go back to 2010 when the rebalancing program was put in place, that looked pretty sensible,” King told reporters in London today. The plan incorporated spending cuts, tax changes and automatic stabilizers and “those still seem to me exactly the right three things,” he said.
Bank of England Governor Mervyn King signalled continued support for Prime Minister David Cameron’s budget squeeze as he cut forecasts for economic growth and said Britain’s recovery will be a “slow process.”
“If you go back to 2010 when the rebalancing program was put in place, that looked pretty sensible,” King told reporters in London today. The plan incorporated spending cuts, tax changes and automatic stabilizers and “those still seem to me exactly the right three things,” he said.
He said while the government has cut spending faster than planned, contributing to a weaker-than-expected economic performance, “that means there’s less consolidation to do in the future, so there will be less need for fiscal tightening in the future than was thought two years ago.” Asked whether the government should have a “plan B,” King said “no.”
Exaggerated Weakness
The Bank of England also said in the report that while one- time factors exaggerated the second-quarter contraction, the economy is likely to remain subdued in the near term. Britain faces a struggle to recover from a double-dip recession amid the efforts to cut the budget deficit and the euro-area debt crisis.
It said the outlook for the U.K. growth is “unusually uncertain” and the greatest threat “stems from the risk that an effective policy response is not implemented sufficiently promptly in the euro area.”
“Many of the conditions necessary for a recovery are in place, and the Monetary Policy Committee will continue to do all it can to bring about that recovery,” King said. “As I have said many times, the recovery and rebalancing of our economy will be a long, slow process.”
Rachel Reeves, a Labour Treasury spokeswoman, said the lower Bank of England forecasts reinforced the need for a change to the budget program.
“The chancellor’s policies aren’t only causing short term pain, but long-term damage to our economy too,” she said in an e-mailed statement. “We urgently need a change of course.”
Inflation Outlook
The central bank also published inflation forecasts today that signal more stimulus may be needed to meet its 2 percent consumer-price goal. It kept its bond-purchase target at 375 billion pounds ($587 billion) and its benchmark interest rate at 0.5 percent on Aug. 2. It increased the quantitative-easing target by 50 billion pounds last month in a program due to end in November.According to the report, inflation is a “little more likely to be below” the goal for “much of the second half of the forecast period.” U.K. inflation slowed to 2.4 percent in June and the central bank said the risks are “broadly balanced by the end of the forecast period.”
The projections are based on QE staying at its current level and an interest-rate reduction by the second quarter of 2013, according to market forecasts published in the report.
Rate Cut
King said today that the Bank of England’s view for now is that a reduction in the interest rate would be more damaging than beneficial. He said that policy makers can take other measures if needed to meet the inflation goal, including an expansion of bond purchases.
King’s tone was “not quite as dovish as some may have been expecting,” said David Tinsley, and economist BNP Paribas SA in London. “But as far as policy is concerned it is clear the current projection falls well short of the 2 percent target and on this basis more QE in November appears likely.”
The central bank said a “gentle pickup in the growth of households’ real incomes, combined with the stimulus from the asset-purchase program, and the Funding for Lending Scheme, should spur a modest recovery.”
Still, it added that exports have fallen due to slowing global demand and that the pound’s appreciation over the past year, particularly against the euro, may hamper exports.
If the gains were to continue, “it could make it harder for British producers to compete in world markets,” the central bank said.
German Exports
Elsewhere, data showed German exports dropped more than economists forecast in June and industrial production declined. Exports, adjusted for work days and seasonal changes, fell 1.5 percent from May, when they jumped 4.2 percent, the Federal Statistics Office said. Industrial output slipped 0.9 percent. German factory orders declined twice as much as forecast in June, according to a report yesterday.
Also today, Spanish industrial production fell 6.3 percent in June from a year earlier, a 10th consecutive decline, a separate report showed.
In Asia, Japan posted a bigger-than-estimated current- account surplus in June as oil prices fell to a low for the year, easing concern that the nation is at immediate risk of needing overseas funding to service its debt burden.
The excess in the widest measure of the nation’s trade was 433.3 billion yen ($5.5 billion), compared with 215.1 billion yen in May. The median estimate of 21 economists surveyed by Bloomberg News was for a surplus of 415.4 billion yen.
The decline in crude prices limited Japan’s fuel bills, as trade figures showed the first drop in imports since 2009, after last year’s earthquake and nuclear meltdown bolstered demand for imported oil.
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