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“Recession worse than first feared” – BoE deputy

The UK has an odds-on chance of suffering an even deeper recession than first feared, the Bank of England’s deputy Governor, Charles Bean, has warned.

The Bank last week predicted a near 4 per cent year-on-year fall in output as the credit crunch tightens its grip on the wider economy. But Charles Bean told an audience in Birmingham there was “roughly a three in four” chance of growth even weaker than the Bank’s already-gloomy central projections. Lingering woes in the banking sector and nations shunning free trade in favour of protecting their own industries could hinder a recovery, according to Mr Bean. He told the National Farmers Union: “It is possible that efforts to restore the banking system may take longer to bear fruit, and that the adoption of protectionist measures abroad as the downturn deepens may slow the recovery.”

But he added that policymakers were working on the “missing bit of the toolbox” which would help protect the economy by placing tougher restrictions on banks’ balance sheets. He said that a “failure of imagination had been in part to blame for the wider economic carnage caused by a debt-driven boom in property and asset prices… no one really foresaw the virulence with which the crisis would unfold”.

Bean argued that keeping interest rates at a higher level between 2004 and 2007 “would just have implied markedly higher growth and higher unemployment at an earlier stage.”

Needless to say, Bean does not regard LVT as one of the missing bits of the toolbox. We beg to differ. And how long will this go on for? We do not have a crystal ball but we can recognise a land based boom-bust when we see one. Of the past two, the 1974 crash took eight years for a recovery whilst that of 1992 took five. This one looks as bad as that of 1974, and it is not going to bottom-out until 2010. On past performance then, no recovery can be expected until 2017. The Chancellor’s wishful thoughts of a recovery in 2010 look hopelessly optimistic, yet that is the the assumption that the government is acting on. On that basis the future state of public finances don’t bear thinking about. Britain and some other countries will be lucky if they come out of this without a Zimbabwean style hyperinflation, since those in charge clearly do not understand the nature of what they are having to deal with.

Read the report in the Daily Telegraph here.