UK economy is back in recession faster than originally expected and seems unlikely to recover soon, as the official figures published today confirm the warning launched Tuesday by the Bank of England (BoE) governor, Mervyn King, according to AP and Reuters. GDP contracted by 0.3% during January-March 2012 as originally expected, but in the last quarter of 2011 saw a decline of 0.4%, deeper than previously thought (0.3% ), the National Statistics Office announced Thursday.
Britain’s economic prospects have worsened in recent weeks because of turbulence in the euro area, warned Tuesday the Bank of England governor Mervyn King. “In the last six weeks … I was very impressed by the many changes that have occurred since we issued the report on inflation in May. I am pessimistic on euro area perspective, which is still getting worse,” said King to the Treasury Committee of the British parliament. The data released Thursday could make the Bank of England to resume the asset purchase program of 325 billion pounds (511 billion dollars), as part of its effort to support the UK economy’s fragile recovery. Already, analysts estimate that the BoE will inject another 50 billion pounds at the monetary policy meeting on July 5.
Last year, the BoE has decided to activate the program of purchasing assets with another 75 billion pounds ($116 billion). This is a monetary policy strategy that involves injecting large amounts of money into the system when needed to maintain the short-term interest at a very low level and to provide sufficient liquidity to banks to revive lending. Most analysts expect interest rates to remain at 0.5% in 2012 and 2013. We believe that the recession will likely continue in the second quarter of 2012. There are many factors that may constrain recovery, especially tighter credit conditions,” warned Vicky Redwood at Capital Economics.
Banks have become reluctant to extend credit to individuals and businesses as they needs to raise capital and reduce the non-performing loans. In May, Bank of England (BoE) has revised down the estimates of economic evolution this year and warned that inflation will remain above the target set for another year. Three months ago the Bank of England forecast an advance of the UK GDP of 1%, and recently estimated an increase of 0.8% in 2012. Also, the BoE has dropped the 2% inflation target by the end of the year. For 2013 Bank of England expected an advance of 2.7% of Great Britain GDP, compared to 3% as estimated in February.
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