Belfast Telegraph

We're not out of woods until Europe is

PwC's warning on province after Bank says growth to flatline

By Margaret Canning and Oliver Wright

Solving the eurozone crisis is "essential" to underpin Northern Ireland's economic recovery.

Dr Esmond Birnie of PricewaterhouseCoopers spoke as the Bank of England's quarterly inflation report predicted that the UK economy would grind to a halt this year - compared to a prediction in May of 0.8% growth.

But the Governor of the Bank of England suggested it was not considering cutting interest rates further from their current historic low of 0.5% warning that the move could be "more counterproductive than beneficial".

Announcing its revised forecasts Sir Mervyn King blamed the crisis in the eurozone, which he described as "a saga that goes on, and on, and on", as the main cause of the slowdown.

Dr Birnie said the eurozone crisis was taking its toll on the economy, which is heavily dependent on selling to the Republic.

A report from PwC has forecast a contraction in the economy of 0.4% this year.

Dr Birnie said: "The unresolved eurozone crisis remains the greatest barrier to recovery - solving that is essential to underpin Northern Ireland's recovery."

But PwC's chief economist said UK-wide data showing falling output in the last three quarters "may not be as weak as has been suggested".

"As that works through the system we might expect some better data in the third quarter and as inflation continues to fall, household incomes will begin to grow in real terms, helping to stimulate consumer spending."

Wilfred Mitchell of the Federation of Small Businesses, said the downward revision was "deeply disappointing".

"The continued gloomy economic news will not give small businesses the confidence they need to grow and invest.

"Challenges remain across the economy and the Government must act quickly with policies that will stimulate growth."

Sir Mervyn King said the Government's tough austerity measures had been a drag on growth. He added that the extra bank holiday in June for the Diamond Jubilee celebrations had reduced output by around 0.5%.

"The underlying picture is that output has been at best broadly flat over the past two years, and has continually disappointed," he said. Sir Mervyn said early indications on the £80bn "funding for lending" scheme to unclog the flow of credit were positive, with some banks cutting loan rates.

The weakness in euro area in particular was hitting demand for UK exports he said and efforts to rebalance the economy "will require patience".

"As I have said many times, the recovery and rebalancing of our economy will be a long, slow process," he added.

Some analysts had been expecting an early cut in interest rates.

But Sir Mervyn said a rate cut was not a move the Bank would "contemplate immediately" as it would damage some financial institutions.

"We have not cut Bank Rate [from a record low of 0.5%] because it would be counter-productive and hurt the building society sector," he said.

In better news the Bank said the near-term outlook for inflation was lower than three months ago.

Tax rate issue must be top of the agenda amid gloomy forecast

By Hal Catherwood

The Bank of England yesterday cut both growth and inflation forecasts in what appears to be another confirmation of the significant headwinds facing the UK economy. In a speech littered with the usual nautical allusions as well as some fairly cumbersome references to the Olympics, Sir Mervyn King told us again what is only too apparent to the vast majority.

The growth forecast has been cut to close to zero and expectations of further monetary easing have subsequently increased. Suggestions of an interest rate cut were, however, swiftly denied, which at least allowed sterling to strengthen against both the euro and the US dollar - a silver lining for those leaving Northern Ireland for a late summer holiday perhaps.

However, the effect on the province of these latest downgrades is as yet unknown. There is no doubt that our economy is closely enough linked to that of the rest of the UK to follow largely the same trends.

A recent report by PwC states that we are lagging the UK as a whole and predicts that our economy will shrink further this year. According to PwC, almost 11,000 jobs have been lost in the private sector in Northern Ireland in the last two years. The "black cloud" of uncertainty continues to hang over us.

Although these downgrades have increased the likelihood of further easing, the form this will take is as yet unknown. Perhaps local politicians should move the question of our corporation tax levels back up the agenda and into the spotlight. If Northern Ireland is to stimulate growth and reduce reliance on the public sector, an ability to compete on a more level playing field with our neighbours in the Republic is vital.

Olympic battle ahead as losing streak continues

By David Elliot

Q what has the Bank of England done?

A In its quarterly inflation report, Bank of England governor Mervyn King said the UK economy won't grow at all this year, an even more pessimistic view than the 1% growth he'd expected as recently as May. And even in 2013 he's not overly optimistic, with growth targets of just 2%.

Q Why is the central bank so negative?

A In a word: Europe. Mervyn King reckons the eurozone crisis could derail the recovery of the UK economy.

If you look at the latest gross domestic product data you can see why he's so worried because the UK economy shrank once again in the three months to the end of June, dragging us further into the second leg of a double- dip recession.

The eurozone is the biggest buyer of UK exports, particularly for Northern Ireland with 37%, over £2bn, worth of goods and services heading to the Republic every year.

Much will depend on whether the European economy manages to drag itself back to health over the next few months.

Q What are they going to do about it?

A Lots of people had been expecting Mervyn King to hint that he'd be lowering interest rates from the current historical low level of 0.5%.

That would have been unprecedented but the banker seems to be avoiding such a move because he's worried it might hurt commercial banks. Instead he seemed to be saying that the bank is getting ready to print more money. It's already pumped £375bn into the economy this way, not by physically printing banknotes but by buying up short-term bonds. This puts more money into the economy and should in effect get the banking system working again. The last round of QE was announced in July and once that is completed (over the next few weeks) the central bank is expected to announce another £50bn boost.

Q Will it work?

A Looking at the GDP numbers it doesn't seem to have had much of an impact so far but maybe that's because enough money hasn't been pumped into the economy. Even Mr King said the Bank of England should have launched more quantitative easing earlier. "It's fair to say that perhaps we haven't done enough."

Q Is the Bank of England alone in trying to stimulate its economy?

A Don't be daft. Every central bank from the US Federal Reserve to the European Central Bank and plenty in between are in the midst of similar schemes in what the Bank of England calls an "unprecedented" unilateral call to arms.

Q What does Mervyn King say?

A "Unlike the Olympians who have thrilled us over the past fortnight, our economy has not yet reached full fitness. But it is slowly healing. Many of the conditions necessary for a recovery are in place."

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