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‘Recovery in sight’? 5 caveats to King's 'optimism'

Bank of England governor Mervyn King has glimpsed a ‘more encouraging underlying picture’ to the economy.

‘Recovery in sight’? 5 caveats to King's 'optimism'

‘There is cause for optimism,’ Bank of England governor Mervyn King said today – a UK economic ‘recovery is in sight’.

King’s enthusiasm in his opening statement for the Bank’s flagship quarterly report might however seem at odds with gloomy contents of the report itself. 

It concludes that the economy is likely to see a 'slow but sustained recovery over the next three years' – exactly the same conclusion it drew in its November report.

In fact the Bank’s growth outlook in today's Inflation Report was marginally weaker than it had been three months ago, when King had been more circumspect, admitting that it was ‘difficult to discern the underlying picture’.

So how, three months later, has King glimpsed a ‘more encouraging underlying picture’?

The report outlines several signs of improvement. But beware caveats:

1. Global improvements

‘Further out, a continued easing in domestic credit conditions – supported by the Bank’s asset purchase programme and the Funding for Lending Scheme – together with a stronger global backdrop, underpin a slow recovery in output.’

There’s been ‘some improvement in the global environment’


‘The risks are weighted to the downside, not least because of the challenges facing the euro area.’

2. Funding costs fall

‘UK banks’ funding costs have fallen further, aided by the improved financial environment and the Funding for Lending Scheme (FLS). And there is growing evidence that this is feeding into private sector credit conditions: many loan rates to households and companies have fallen and some measures of credit availability have improved.’


‘It is still too early to know the extent to which this improvement in funding conditions will lead to an increase in net lending to the real economy, which remains flat.’

3. Weak pound helps exports

'In the first three quarters of 2012, UK export markets expanded moderately as persistent weakness in the euro area was offset by solid growth in other advanced trading partners.' 


‘Falls in services exports dragged down total UK exports’.

4. People have jobs

'Since mid-2010, private sector employment has grown strongly, more than offsetting a fall in public sector employment'


‘Unemployment remains elevated, however, and there appears to be a considerable margin of slack in the labour market’

‘The strength of private sector employment growth since mid-2010 contrasts with the weakness in private sector output growth’

5. Above target inflation is okay!

‘As long as domestic cost and price pressures remained consistent with inflation returning to the target in the medium term, it was appropriate to look through the temporary, albeit protracted, period of above-target inflation.’

‘Inflation is expected to fall back to around the target by the end of the forecast period, as a gradual revival in productivity dampens domestic cost growth, and external price pressures fade.’


‘CPI inflation is likely to rise further in the near term, and may remain above the 2% target for the next two years. That is a higher profile than three months ago’

7 comments so far. Why not have your say?


Feb 13, 2013 at 15:32


- interest rates will stay low over next three years while

- inflation remains about the same therefore

- less likelihood of bond 'bubble' bursting, while

- growth remains subdued but trend is more positive than negative so

- quality equities remain attractive which

- will grow dividends, doing better than

- stocks based on a mirage of dramatic growth but yielding nothing

- caution, muted growth and recurrent risks should damp volatility which means

- we can invest in balanced portfolios on the basis of fundamentals without worrying so much about wild swings provided that

- we factor in depreciation of the pound and

- we are agile enough to get out of sudden risk (political, conflict)

I wish!

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peter hart

Feb 13, 2013 at 15:41

its all true.

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Alan Tonks

Feb 13, 2013 at 16:42

Recovery insight, what utter nonsense as for the 5 warnings, I would increase that by that 375 billion caveats at least.

I assume when King retires, he will be going for a refresher course in kindergarten accountancy.

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Alan Tonks

Feb 13, 2013 at 16:44


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Feb 13, 2013 at 16:49

Mervyn must have massive balls to be able to bluff that inflation has nothing to do with monetary policy when its only cause is monetary policy.

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Anthony O' Grady

Feb 13, 2013 at 19:35

Merv doesn't know his arse from his elbow!

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Long Term Investor

Feb 13, 2013 at 20:52

Is the old saw 'A Bull market climbs a wall of worry, and only reverses when the last worryier joins the Bulls' appropriate. On this basis, I may agree with Mervyn, but heaven help us when he sees no downside....

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Nigel Thomas to retire after 40 years in funds

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