Britain has moved ahead of other leading economies in the race to restore the stability of its banking system and pave the way for economic recovery, said Professor Adam Posen, and that more decisive and “forthright” action by the Government had left Britain further forward in putting the banking system on a more normal footing than some of its leading competitors.
“The UK seems to be well ahead of the US and most euro area governments in this area of providing banks capital and disclosing their real situation,” Professor Posen, who joins the Bank’s Monetary Policy Committee in September, told MPs.
He said that the West’s leading economies faced a race to “beat the clock” so that banks’ operations returned to relative normality before extraordinary stimulus measures to shore-up growth ran out.
“If you do not fix the banking system by the time your stimulus runs out, then private demand will not pick up when the stimulus runs out,” he told the Commons Treasury Committee. “That’s what we saw in Japan in 1997, and that is what we saw in Japan in 1999-2000. So we have a clock ticking here in the UK as in the US and the euro area.”
But the professor said Britain was now among the best placed of leading economies, contrasting this with the situation in his native United States where he feared further problems from the banking sector.
“I think in all honesty the UK is closer to beating the clock than the US or Germany,” he said. “I am more concerned about the bank issues coming back to the fore in the US than in the UK. I think there’s still a lot of unfinished business.”
“Looking ahead to the UK I think we’re looking at a firming of conditions and I would be surprised if we did not get back to growth by early 2010, possibly earlier,” he said.
But he cautioned that the recovery was likely to follow a “sawtooth” pattern, with a revival coupled with intermittent setbacks.
He warned that renewed growth was likely to be relatively weak, with any return to a pace of growth above the economy’s long-term speed limit or trend rate “unlikely”.
“There is a possibility of above-trend growth, one has to hope for that. But I don’t foresee the UK or any other major economy getting a smooth above-trend path for the next couple of years,” he said.
“The risks right now certainly are more about deflation than inflation in the short-term,” he said. “What Japan has demonstrated is that once you fall into a really deflationary situation, it’s very hard to get out. It’s very sticky,” he said. He added: “There remains reason to think that undershooting a 2 per cent inflation target has somewhat greater costs and risks to real economic output and employment than overshooting it by the same amount.”
“I see stronger sterling against the euro in the medium-term,” he said. “In the very immediate term, the potential that slower action on policy from the [European Central Bank] will lead to an interest rate gap that could temporarily push up the euro.”
Extract from UK Times Online
