Bank of England rate-setter fears new UK recession

[June 30, 2010]  LONDON (AP) -- Britain could be pushed back into recession by the government's austerity moves and slow recovery in key export markets, a member of the Bank of England's rate-setting Monetary Policy Committee said Wednesday.

Adam Posen said he sees the British economy is poised between a weak recovery and a drop back into recession, but believes current monetary policy and sustained growth outside Europe can keep Britain out of recession.

If that proves to be the case, Posen said Britain would continue to have above-target inflation. He added that once a recovery is secure he would support a rise in the base rate from the present all-time low of half a percent.

The new coalition government in Britain has recently announced further cuts in spending -- 25 percent for most departments -- and some tax increases in response to last year's record budget deficit.

The Guardian newspaper on Wednesday reported that a Treasury document forecast that as many as 120,000 jobs could be lost from the public sector and 140,000 from the private sector in each of the next five years.

"I have laid awake a number of nights recently trying to figure out how big is the risk that the major economies are repeating the mistake of the US in 1937 -- or in milder form Japan in 1997 -- by tightening fiscal policy too much, too rapidly," Posen said in a speech to the Society of Business Economists in London.

That issue has divided the G-20 major industrial and developing nations, with U.S. President Barack Obama warning against killing recovery by retrenching too rapidly. At the group's recent summit in Canada, G-20 nations committed developed countries to cutting deficits in half by 2013 and stabilizing total debt burdens by 2016. But they also left room for countries who can afford it to continue economic stimulus.

"For the U.K. specifically, unlike the U.S. or Japan then -- or even now -- there may simply be no choice the structural budget deficit is now too large, the state share of the economy has become too high, and the risk of savings leaving our markets remains very small but still too great," Posen said.

The case of austerity in low-debt economies in Europe and Asia is less clear, and he said he was "halfway convinced" that the world will not fall back into a deep recession even if there is excessive austerity.

"In my opinion, that leaves the U.K. economy tentatively in the recovery state, but still subject to switching back into the recession state," Posen said.

Posen voted with the majority of the Monetary Policy Committee this month to hold the base rate at 0.5 percent, but member Andrew Sentance advocated a hike to 0.75 percent because of his concern about inflation -- currently 3.4 percent compared to the government target of 2 percent.

In an effort to pull Britain out of a deep recession which lasted 18 months, the Bank dropped the rate to its current low in March 2009 and at the same time launched an asset-purchases program which eventually pumped 200 billion pounds ($300 billion) into the economy.

"If we are fortunate, our present monetary policy stance combined with the U.K.'s economy's natural tendency to recover and with sustained global growth outside of Europe will be sufficient to get the U.K. to the good outcome," Posen said. "That would result in more inflation overshooting in the interim, given our policy stance, and in that state of affairs I would be only too happy to vote for an interest rate increase."

[Associated Press; By ROBERT BARR]

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