Bank governor in recession warning

12 April 2012

Bank of England Governor Mervyn King became the first major public figure to warn of a UK recession as he said the economy faced a "long, slow haul" to repair the damage from the banking crisis.

He told business leaders that the combination of lower take-home pay and reduced lending posed "the risk of a sharp and prolonged slowdown in domestic demand".

"Indeed, it now seems likely that the UK economy is entering a recession," Mr King said.

The Governor has now joined a raft of other forecasters in explicitly using the "r" word, in contrast to the Prime Minister and the Chancellor Alistair Darling who have so far used other descriptions to describe the worsening economic situation.

Mr King also said country's banking system also came closer to collapse during recent weeks than at any time since the First World War.

Meltdown was threatened after an "almost unimaginable" chain of events set in train by the collapse of Lehman Brothers in September, he said.

In the Leeds speech, Mr King said: "Why has the outlook deteriorated so quickly? The banking crisis dealt a severe blow to the availability of credit...

"We now face a long, slow haul to restore lending to the real economy, and hence growth of our economy, to more normal conditions."

A recession looms because the credit squeeze came at a time when disposable incomes were falling due to rising energy and food prices.

Mr King added: "So, taken together, the combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand."

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