Recession’s end still some way off

Shropshire Star Business Editor Amy Bould talks to the Bank of England’s Kate Barker about the hopes of economic recovery.

Kate Barker, a member of the Bank of England's Monetary Committee, and the Shropshire Star's Amy Bould

Perhaps the most important woman in British economics, Kate Barker, was heading back to her London office today after two days in Shropshire hearing the concerns of businesses across the county.

Mrs Barker, currently in her third term as a member of the Bank of England’s Monetary Policy Committee, is an economist extraordinare.

A former chief economic adviser at the CBI, and previously chief European economist at motor giant Ford, she is also the only woman on the MPC, in a post she has held since 2001.

But Mrs Barker is no stranger to being the only female on the team. Former Chancellor Ken Clarke took advice from a team of economic advisers, which up until Mrs Barker joined them had been dubbed the Seven Wise Men.

Now she is one of the most important decision-makers in England on monetary policy. And although not a household name in Shropshire, she is one of the nine people responsible for seeing thousands of Shropshire households’ mortgage repayments drop dramatically over the last year.

The MPC is responsible for setting interest rates and the good news, for many home-owners if not for savers, is that they don’t look likely to go up anytime soon.

Not that Mrs Barker has a crystal ball. In fact during an interview at Shrewsbury’s Albrighton Hall Hotel, she is somewhat cautious over making predictions even to the point of acknowledging that should the UK technically come out of recession by the end of the year, it could be too soon to actually say so.

Mrs Barker said: “Being honest about this, I think this game of whether you’ve got a little bit of positive growth or not, isn’t for me what coming out of recession is.

“For me, coming out of recession will be when we start to see unemployment turn down, and unfortunately I think that’s some way off here and it may be some way off in the rest of Europe as well.

“I think I would expect rising unemployment over the next six months or so, but the fourth quarter should see a period of positive growth. But saying that means the recession is over? That could be running up the flag a bit early.”

Experts had expected Britain to move out of recession, with a forecasted economic growth of 0.2 per cent last quarter. But new figures showed the UK’s economy had continued to decline, with a 0.4 contraction in the UK gross domestic product.

Mrs Barker said: “However, the prospects for growth in the fourth quarter look pretty soundly based, not least because the prospects of the end of of the reduction in VAT may encourage people to go out and buy some big ticket items.”

Mrs Barker was one of the nine members of the MPC which, under the leadership of Bank of England Governor Mervyn King, has been behind the the decision to pump billions of pounds of “paper money” into the beleaguered economy as part of its quantitative easing (QE) programme.

The programme, a policy of injecting money into the economy through buying bonds from banks and other companies, was increased by £25 billion last week, bring the total to £200 billion since March 2009.

But is it working?

Certainly many small businesses in Shropshire say they are not feeling the effects of the extra cash in the system.

Mrs Barker said: “People think that this money is flowing straight into the banks, it isn’t. It flows through a range of institutions into the sector. And the way in which it has worked has turned out that the institutions which have been selling gilts to us and getting cash, have then invested the cash in other things.

“That’s helped support the corporate bond market and for bigger companies that has been incredible helpful.

“What is absolutely true is that we haven’t really seen it flow through into small business lending, and perhaps it was optimistic to suppose that it would.

“Given the difficulties that the banks still face with their own capital positions, and the prospect of having to shore up their capital position, it’s perhaps not surprising that they are relatively cautious in the smaller lending market. QE has been been extremely helpful for the economy, it’s helped hold low rates down, it’s helped push up asset prices and helped sustain confidence, all that’s been very good but it’s not Heineken.”

Presumably, comparing the Bank’s QE programme to a lager which reaches parts other beers can’t reach, it is certainly true that the £25 billion pumped into the economy does not appear to have reached smaller enterprises, which make up around 90 per cent of Shropshire’s economic landscape. A British Chambers of Commerce survey on Monday said a third of companies found access to finance harder since QE was introduced.

And as for inflation and interest rates? Mrs Barker believes over the next few months there will be “a whole variety of things” which are are going to push inflation up, not just the end of the reduction of VAT, but also the increase in petrol prices and oil prices. But interest rates are not expected to go the same way – not anytime soon.

“Given that we’ve just announced a couple of weeks ago that we were going to put another £25 billion into the economy, that suggests that we expect to keep on putting stimulus into the economy in the short term, which doesn’t suggest that interest rates are going to move up anytime in the future.

“Beyond that, its difficult to say.”