THE BANK of England warned yesterday that the “green shoots” now visible in the economy could wither as private sector banks might not have sufficient lending capacity to fuel the recovery.
Disregarding most of the optimism in financial markets and business surveys, bank governor Mervyn King judged that the short-term and the longer-term outlook for growth had deteriorated since February. The future was highly uncertain, he said.
The bank’s new forecast suggests that a W-shaped recession – a rebound as mothballed factories reopened, followed by another downturn next year – is a distinct possibility.
“The risks are weighted towards a relatively slow and protracted recovery,” Mr King said.
The governor said that banks would limit their lending because they could not afford losses that might result in their eventual nationalisation. “If the banks are going to continue as private sector entities they will naturally behave in a risk-averse way for a while.”
Estimates show the bank’s projection is for the economy to contract by 3.8 per cent in 2009 and to grow by about 1.1 per cent in 2010. This compares with the forecast of 2.3 per cent growth next year, made only three months ago.
Some economists thought the forecast overly gloomy given the pickup in credit in the first quarter.
Ben Broadbent, of Goldman Sachs, said: “To be more pessimistic about lending than three months ago is perverse.”
Karen Ward of HSBC said: "For what is probably the first time in a number of years, we are more optimistic than the monetary policy committee." – (Copyright The Financial TimesLimited 2009)
