‘THE world economy remains in a deep recession and its financial system in a fragile condition,’ said Bank of England governor Mervyn King yesterday.
These were his first words as he opened his press conference, stamping on the desperate optimists who had already claimed to have spotted the green shoots of recovery.
He continued that the Bank Rate had fallen to zero and ‘the MPC has announced a programme of asset purchases totalling £175 billion and further hundreds of billions of pounds have been directed to supporting the banking system.’
King added: ‘Activity in the UK economy has continued to fall. The level of GDP is around 6% below its peak, and manufacturing output is more than 10% down on a year ago. Unemployment continues to rise. The recession appears deeper than the MPC thought likely at the time of the May Report.’
He warned the ‘green shoots’ people that ‘given the depth of the recession, to erode the margin of spare capacity that has been created will require an extended period of robust growth. . . Recovery could be slow and protracted.’
Confirming that the bank may have to print a lot more money, King said: ‘The ability to conduct asset purchases to boost the supply of money does not depend directly on the banking system’s ability to lend. But constraints on the supply of lending will diminish its effectiveness in stimulating a recovery. It will take time for banks to repair their balance sheets and they face considerable challenges in replacing those sources of funding that dried up in the financial crisis and the temporary support provided by the public sector. Our continuing operations in corporate credit markets are helping to ensure that, for some companies at least, an alternative source of finance is readily available.’
He warned: ‘The pace of recovery over the next few years is highly uncertain.’
King forecast growth on the assumption ‘that the Bank Rate follows a path implied by market interest rates and that the stock of purchased assets, financed by the issuance of central bank reserves, reaches £175 billion and remains at that level throughout the forecast period.’
He argued that while ‘The stimulus to demand, combined with a turnaround in the stock cycle and the effects of the depreciation in sterling, is likely to drive a recovery in activity. . . the likelihood of a prolonged period of balance sheet adjustment in the financial, private and public sectors means that the Committee judges that the risks are weighted towards a relatively slow recovery’.
Again he tramples over those green shoots, adding that ‘In the short run, inflation is likely to be volatile, at first falling quickly as the impact of last year’s sharp increases in energy prices drop out of the twelve-month comparison, before rising sharply as last year’s VAT cut is reversed.’
Speaking about the £175bn of monetary easing, King states: ‘The Committee is very conscious that at some point this extraordinary degree of policy stimulus will need to be withdrawn’, but he could not indicate when this point will arise.
King, and British capitalism, are very much walking the tightrope, blindfold, over the Niagara falls, knowing that they are trusting on their luck holding, and that even stormier weather is on the way.
Meanwhile the number of unemployed has reached 2.43 million, increasing by 220,000 over the quarter, and by 750,000 in the year. The number of redundancies in the three months to June 2009 was 277,000, down 9,000 over the quarter but up 150,000 over the year.
The number of economically inactive people of working age rose by 127,000 over the quarter and by 83,000 over the year, to reach 7.95 million.
British capitalism is dying, its manufacturing base is being wound up while its banks have extremely limited deposits. It knows that the only way out of the crisis is to abolish the Welfare State, while abroad it seeks to redivide the world alongside the US.
The only way out for the working class is to carry out a socialist revolution.