Thursday, June 19, 2008

Bank of England sounds the Alarm

A great article from the UK's Telegraph highlighting the Bank of England's recent sounding off of alarm bells.


Things will get worse, warns Bank of England governor Mervyn King

By Edmund Conway and Robert Winnett

Families will see their standard of living stagnate this year while the value of their homes will fall further, the Bank of England Governor has warned. The coming months represent the biggest challenge for the economy for two decades, Mervyn King said, adding that some households will find them "particularly difficult".

In his most sombre message yet, Mr King said families were being squeezed hard by higher electricity and food prices on the one hand and slowly-increasing wages on the other.

The Chancellor of the Exchequer Alistair Darling, the Lord Mayor of the City of London, Alderman David Lewis, and the Governor of the Bank of England Mervyn King
Alistair Darling (left), the Lord Mayor of the City of London, Alderman David Lewis, and the Governor of the Bank of England Mervyn King

He told Alistair Darling and leading City dignitaries in London that the experience would be even tougher than the credit crunch, and warned that the "era of cheap mortgage finance... is over".

Mr King said: "This year our real take-home pay will rise at a slower pace than national productivity. Rising fuel, gas, electricity and food prices, mean that average real take-home pay will stagnate this year.

"It will not be an easy time, and I know that some families will find it particularly difficult."

In a blow for The Chancellor of the Exchequer, beside whom he delivered his speech at the annual Mansion House banquet last night, he warned: "The squeeze on real take-home pay will arguably be an even more significant restraint on consumer spending this year than the credit crunch.

"And it will affect the housing market too – lower demand in the high street will go hand in hand with lower demand in the property market." The Governor said house prices would fall in comparison to families’ earnings - an indication that their values have some way further to drop.

The speech was the most austere yet delivered by Mr King, who has previously warned that the so-called NICE decade (standing for non-inflationary consistent expansion) was over. The comments come in a week inflation rose to its highest level in 15 years, outpacing wages and threatening to reduce Britons' standard of living.

Mr King was forced earlier this week to write his second letter of explanation to Mr Darling for allowing inflation to rise above target. However, the Bank Governor urged families not to panic, reassuring them that this tough period would be short-lived. "These changes to our spending power and to the housing market are 'real' shifts that, although not easy to accept, we cannot side-step," he said. "We face the most difficult economic challenge for two decades. But I am confident that we can meet it. Inflation will fall back and growth will recover."

He and the Chancellor urged families not to demand higher wages and push prices even higher. In his first address to the masnion House event since becoming Chancellor, Mr Darling dismissed suggestions that the economy is heading for a 1970s-style meltdown.

But he warned that inflation did need to be brought under control and that people should exercise restraint in pay negotiations to avoid the current economic woes deepening.

On Wednesday it was disclosed that the Shell tankers' driver strike was called off following a 14 per cent pay rise offer. Mr Darling said: "I have seen reports suggesting inflation figures show we are returning to the days of the 70’s. "They are wrong, both in the nature of the problems we face and also in the scale. Today’s inflation must be tackled. We cannot be complacent. "But in comparison to the 1970s when it reached over 26 per cent, it remains low. Even in 1991, it was still at 8 per cent." The Chancellor said that inflation was rising as a result of global economic turbulence which was rapidly pushing up the price of food and energy.

Consumers have been warned that gas and electricity bills could rise by up to 40 per cent this winter. However, Mr Darling urged workers not to make matters worse by pushing for inflation-busting pay rises. "Continued restraint on pay is required from both the public and private sector," he said. "We must recognise the need to reward efforts of people who work hard.

"But to return now to inflationary pay settlements would undermine rather than raise people’s living standards with a damaging circle of wage increases eroded by steadily rising prices. "We must never return to those days." The warning was sounded amid growing disquiet from public sector unions over the pay increases - which are now below inflation - agreed with the police, teachers, nurses and council workers. Many are now threatening strike action and are demanding that the pay agreements are renegotiated. There are growing concerns the resolution of the Shell dispute could encourage further industrial action.

The Government could face a major challenge next week when Unison announces the results of a strike ballot among 600,000 council workers. The workers have rejected a 2.45 per cent pay increase. In a BBC interview, Mr Darling repeatedly declined to reject suggestions that Britons would face a decline in living standards this year - as their wages would rise by less than the cost of living. He also insisted that the economic pain was likely to prove short-lived. "There are very good reasons for people to be optimistic," he said. "Yes it’s tough, but we can get through it."

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