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From optimism to pessimism

  • Stephanie Flanders
  • 11 Feb 09, 05:26 PM GMT

In its latest , the Bank of England has moved from being a relative optimist on the UK economy to - at least when it comes to this year.

But the governor wants us to know that the old lady of Threadneedle Street will do whatever it takes to get the economy moving again - and also that "whatever it takes" might start even sooner than we thought.

bankchart.jpgWhen it comes to the immediate outlook, the change is such that the Bank has had to alter the scale on its famous fan chart for projected growth. Back in November, the bottom of the range of possible outcomes was minus 4% (year-on-year). Now the worst outcome is approaching a scary minus 7%.

They hate translating these charts into a single forecast for growth. But a rough calculation suggests that the Bank's central forecast is now for the economy to shrink about 2.9% in 2009.

That would be the worst decline in a single year in the UK since comparable records began in 1949. The worst year in recent memory was 1980, when GDP shrank 2.1%.

Mervyn KingAs the Governor Mervyn King admitted at today's press conference, the Bank is now more pessimistic than the consensus (although the consensus is falling fast). And of course it's hugely more pessimistic than the midpoint of the Treasury's November forecast, which was a fall of 1%.

So far, so gloomy. But the most striking thing about these projections is the outlook for 2010. The same caveats apply, but they seem to be looking at a central forecast for positive growth next year of more than 2%. That compares to a consensus of just 0.6%.

In many ways, their 2010 optimism is the flipside of their 2009 gloom - usually a steeper decline into recession means a steeper climb out. Mervyn King and his colleagues seem to think this time will be the same, with growth picking up sharply next spring.

After all, we have seen an extraordinary effort by policymakers in the past six months to stop this recession in its tracks, not just in the UK but around the world. And the governor confirmed that we could see even more extraordinary efforts by the Bank's Monetary Policy Committee in a matter of weeks.

On the basis of his comments today, I wouldn't be surprised if the MPC discussed full-scale quantitative easing - the creation of central bank money to buy up public and private assets - at their meeting last week.

We'll find out for sure when the minutes are published next week. But it is now a racing certainty that they will discuss it at their March meeting. Before the meeting we can expect another exchange of letters between the governor and the chancellor explaining that the Bank thinks it might be time to take that step, but that is a mere formality.

The Bank has cut interest rates three times since its last report, and inflation measured by the consumer price index is still forecast to be below target until after 2012. That alone makes the move to quantitative easing a foregone conclusion.

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