–Adds Quotes, Detail To Version Transmitted at 1008 GMT
LONDON (MNI) – Despite widespread skepticism about the Bank of
England’s bullish growth forecasts, output has actually turned out to be
a little stronger than the BOE was projecting, Governor Mervyn King said
at the press conference following the publication of the August
Inflation Report.
King also downplayed the significance of the weakening in recent
business survey data and said he was encouraged by the trade data, which
show rising exports and imports and a shrinking trade gap.
“I think it’s quite interesting that a year ago people were saying
our output forecasts were wildly optimistic but it has been slightly
better than we were projecting over the last year,” King said.
The latest purchasing managers surveys in particular have shown a
softening in the rate of expansion.
“The surveys have weakened over the last couple of months but that
could reverse itself, I wouldn’t put too much weight on that,” King
said.
King also downplayed the apparent deterioration in the economic
outlook in the United States.
“I wouldn’t want to exaggerate about what is happening in the
United States. There’s been some signs of weaker data, but I think the
policy measures they announced yesterday were much more ones designed to
maintain the stance of policy and prevent an inadvertant tightening of
policy,” King said.
“No doubt in coming weeks we’ll hear more from the Federal Reserve
… but clearly we do want to see strong economies in emerging markets,
Europe and the United States,” he added.
King said the BOE now expected UK growth to come in closer to trend
that it had previously expected, with the biggest downside risk coming
from mainland Europe.
“The broad outlook, our central view is growth closer to trend than
before, but with downside risks. That is pretty clear,” he said.
“I think the biggest risk to the UK growth is what is happening in
the rest of Europe, we do need to see a recovery. I think the trade data
are encouraging, we’ve seen two strong quarters for exports. Far be it
for me to put too much weight on one set of numbers, we do need to see a
rebalancing, we need to see growth coming from an increase in net
exports, I do think that could come from Europe,” he added.
Asked about the trade data he said they were “more likely to effect
the composition of demand rather than the judgement the ONS (Office for
National Statistics) will reach about the actual path of output, but it
is encouraging that the data for exports are closer to the more
optimistic surveys. I think that’s encouraging for the financial
rebalancing that we will need.”
King said, however, that credit conditions have not improved in the
wake of the financial crisis as quickly as the MPC had expected and the
fiscal tightening would impact growth.
“Credit conditions are not easing quite as rapidly as we were
expecting when we started to imagine how quickly we would come out of
the financial crisis, they are easing slightly but nowhere near as
quickly as we had expected. The fiscal consolidation, although limiting
the downside risks, has altered somewhat the path of output over the
forecast horizon,” he said.
MPC members, such as executive director Paul Fisher, have
highlighted the threat tight credit conditions and weak credit growth
pose to growth. King said the picture was mixed, with smaller companies
struggling to get funding but larger companies getting around the banks
by issuing new debt.
“There is no doubt that the terms on which credit is being made
available in relation to the bank rate have changed significantly in the
last two years, that’s hardly surprising, given what they must pay to
obtain funding,” King said.
“The impact of that on the long-term recovery of the economy is
hard to judge because a large proportion of investment is carried out by
large companies and what we’ve seen in the last year and a half, the
large companies have been able to issue new (debt and have) got around
the banking sector,” he said.
“The terms at which banks lend is particularly severe for SMEs
which rely more on banks. I think it’s unlikely that what we’ve seen in
bank lending and lending to non-financial companies is falling, you can
still have a recovery with that,” King added.
–London newsroom: tel+44 207 862 7492; e-mail: drobinson@marketnews.com
[TOPICS: M$B$$$,M$$BE$,MT$$$$]