Brown admits UK is heading into recession
Mervyn King, Bank of England governor, admits UK is heading into recession
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Wednesday, 22, Oct 2008 07:47
Gordon Brown has admitted for the first time that Britain is heading into a recession.
The prime minister told MPs that the UK, like other western nations, could not insulate itself from the "global financial recession".
Earlier, the governor of the Bank of England had mentioned the R word for the first time.
Mervyn King said the financial crisis was "deeper seated" than initially feared but praised the government for taking "radical steps" to resolve it.
The governor's comments, to business leaders in Leeds, came as an influential thinktank said the UK was facing four successive quarters of economic slowdown.
The National Institute of Economic and Social Research (Niesr) said the country would not recover from the downturn until 2010.
Speaking during prime minister's questions, Mr Brown had said: "Having taken action on the banking system, we must now take action on the global financial recession which is likely to cause recession in America, France, Italy, Germany, Japan and - because no country can insulate itself from it - Britain too."
Simon Kirby, a research fellow at Niesr, had said: "The economy appears to have contracted over the summer and we are now in our first recession since the early 1990s.
"There is an evens chance that the economy will contract for four quarters in a row."
On Wednesday the FTSE 100 leading share index reacted by falling 2.3 per cent on opening, while the pound fell to a five-year low against the dollar.
At 7:00 BST, £1 was worth $1.628, representing a 22 per cent drop from its peak in November last year when the currency stood over the $2-mark.
Speaking last night, Mr King said he was fully behind Mr Brown and Alistair Darling's actions as he assessed their response to the liquidity crisis.
"Radical action was necessary to ensure the survival of the banking system," he said.
"And on the morning of October 8th that action was taken when the prime minister and chancellor unveiled a UK plan for recapitalising the banking system on which the Bank, FSA and Treasury had been working for a while."
He warned that the government's interventionist lending could be interpreted as a sticking-plaster strategy which conceals "the severity of the underlying problems" and puts off "the inevitable day of reckoning".
But Mr King went on to argue the government's actions had been justified because the fiscal response required by recapitalisation could not come from anywhere else.
"We are far from the end of the road back to stability, but the plan to recapitalise our banking system, both here and abroad, will I believe come to be seen as the moment in the banking crisis of the past year when we turned the corner," he added.
The Bank governor was less optimistic about the immediate prospects for the British economy, expecting a recession next year, but said falling oil prices and the recapitalised banking system would support growth.
He also said the monetary policy committee (MPC) would remain committed to keeping inflation at its two per cent target, emphasising his determination to "reinforce" existing policy. Observers expect a cut from the current 4.5 per cent base rate when the MPC meets next month.