The deputy governor of the Bank of England, professor Charles Bean, has warned that Britain and the world are in the grip of the worst economic slowdown seen for almost 40 years - and expects the problem to drag on for the foreseeable future.
Speaking at a central bankers' conference in Wyoming, Prof Bean said that there is little prospect of an economic recovery until well into next year, which would spell even more gloom in the months ahead for overstretched households struggling to cope with the rising cost of living.
“Last year this was a financial crisis that we thought with a bit of luck would be over by the time of Christmas, but it has dragged on for a year and looks like it will drag on for some considerable time further yet," said Bean. "It's fair to say that if you look at the shocks impinging on us this is at least as challenging a time as back in the 1970s.”
Fears were stoked last week that the UK is sailing into a recession, with the Office for National Statistics revealing that economic growth in the second quarter of 2008 ground to a halt – the weakest performance since 1992. However, Prof Bean believes that there is light at the end of the tunnel, predicting that growth will return next year.
"On the assumption commodity prices remain stable and if anything fall back, then inflation should drop back as we go through next year,” he said. “Should conditions in the credit markets gradually start to improve, those two factors will help to ensure growth will start to pick up as we go through next year.”
However, Bean also acknowledged that the next few months will be a 'tricky period'.
“Household real income is very low - that will make it difficult for households and there are difficult social issues that will arise,” he said. “But the important thing is people realise this is just a transitory period of subdued growth and we will get through the other side and growth will resume to more normal levels.”
Facing up to the slowdown
The deputy governor's stark warning came one day before the International Monetary Fund (IMF) slashed its growth forecast for the global economy this year to 3.9%, down from the 4.1% the IMF estimated in its World Economic Outlook last month. Next year the IMF believes the global economy will grow by 3.7%, down from its previous forecast of 3.9%.
With the economy stalling, inflation expectations are also on the up. The Lloyds TSB consumer barometer, which measures consumers' expectations for interest rates rose for the 10th month in a row, prompting even greater challenge for the Bank of England when it meets next week.
Most of the 2,000 consumers polled believe that both inflation and interest rates will rise over the next 12 months, counter to most predictions of interest rates falling spur the flagging economy. Around 60% believed interest rates would be higher in 12 months’ time, with only 13% predicting a fall.
Trevor Williams, chief economist of Lloyds TSB, says: "Recent price cuts at the supermarket petrol pumps have so far had no effect on consumer inflation expectations. This will be of urgent concern for the Bank of England which has stated inflation will fall back below its two per cent target within two years. If inflation expectations continue to grow, bringing down actual price inflation is going to be increasingly difficult.”
The Bank of England is certainly facing a difficult task. Unemployment levels have increased for six consecutive months, and according to the survey some 62% thought employment prospects will be worse next year, while 30% thought their job is less secure.