Kate Barker warns of risks facing UK economic outlook
Published: 4 February 2011 at 14:01
Former MPC member makes speech during Anglia Ruskin’s financial crisis lecture
Kate Barker last night warned that the UK economy still faces an uncertain future, stating:
“We haven’t yet quite laid to rest all the risks in the financial system.”
Kate, a member of the Bank of England Monetary Policy Committee at the height of the financial crisis, was speaking during an evening of lectures on the financial crisis at Anglia Ruskin University in Chelmsford.
“If you were thinking of the crisis as a game of football, we’re in about the 60th minute. Things are still going reasonably well, but there’s always a chance of some sneaky goals from the opposition.
“There remain worries about sovereign debt in the Euro area. I don’t think anyone’s under any illusions that the issues in countries such as Greece, Ireland and Portugal have completely gone away.
“The period of economic stability in the late 1990s and early 2000s may have been somewhat unhelpful. The longer it continued the more people bet on it continuing, so that it became apparent if something went wrong then the cost could be quite high, as if people believe there is not going to be another downturn, they won’t be positioned for that risk.
“We’ve still got problems in the financial system as bank lending remains very weak. Banks still have their own capital to be concerned about, and so are lending less to small and medium sized companies.
“But, overall it’s more important what is happening with large companies, which have been raising finance. These large companies should have money to invest when they think conditions are right.
“It is easier to identify risks than opportunities. Over the next few years we may have rather sluggish growth and the lack of a feelgood factor. Rising import prices are squeezing incomes and a weaker housing market could also make people feel rather depressed. We might expect a period like the mid 1990s, from which of course we eventually recovered with a strengthening in exports.”
Jerome Booth, Head of Research at the Ashmore Group, delivered a talk entitled “Impacts and opportunities from the crisis for the emerging markets”.
The Anglia Ruskin University honorary painted a gloomy outlook when he said:
“This problem is big; it’s multi country and larger than anything since 1930s. Are we through this crisis – absolutely not. Most of the deleveraging hasn’t happened yet. The biggest capital market in the US is the housing market and it’s still being bailed out as it has been since 1991.
“Basically the best case scenario is five year’s of sub-par growth and there’s about a 35% chance that we will get some sort of catastrophe. That could take the form of depression and there’s the potential of another round of financial crises through failed or botched restructuring of sovereign debt in the Eurozone.
“There’s no doubt in my mind that Greece and Ireland will have to restructure their debt because the level of debt is unsustainable. What I really worry about is a false sense of optimism. In the Eurozone we need clear fiscal discipline – and we’re getting there. We need contingent lines of finance for sovereigns and we’ve got that. We need stronger bail-out funds for banks and credible fiscal rules.
“My main worry is that we will meet all these criteria this year and we attempt some restructuring, but we’re in denial of the scale of the problem.
“In the UK we have a dead body in the kitchen and it’s an enormous mess, but we’re trying to clear it up. In the Eurozone they know it’s there but they have just put a sheet over it and will deal with it later, while in the US they’ve put the dead body in a chair, given it a cup of coffee and are attempting to have a conversation with it. The denial is far, far worse in the US because their problem is far worse. The US put a trillion dollars into the system but it hasn’t worked as they didn’t nationalise the banks so they can’t dictate where the money goes.”
Jerome, who is also the majority shareholder of CBC UK Limited, an independent Lloyd's insurance broker in London, said:
“Risk is everywhere. All countries are risky but in emerging markets the risk is priced in. Emerging markets contribute about 50% of economic activity on the planet, they have the bulk of industrial production and the bulk of energy consumption.
“We have core-periphery disease. The perception of risk is the biggest problem. For several hundred years the US and Europe have dominated and the core believed that they can affect the periphery, but that is no longer the case. The emerging markets are the healthy bit, the solution and we have to be nice to these guys and export to them.”