Governor King warns UK economy needs re-balancing towards exports
Wednesday, 25 January 2012 08:25
The governor of the Bank of England Sir Mervyn King warned yesterday in a speech that the UL faces a long arduous recovery that will be uneven in its scope.
Speaking in Brighton Sir Mervyn said that UK households had received a shock through the financial crisis and the subsequent insecurity and realisation that they needed to pay down debt had changed financial behaviour in the UK to move more towards austerity and living within an individual’s means.
He said: "After many years in which the stock of debt built up rapidly, there has been a reappraisal."
He said that the consequence of this is that households are tightening their belts due to fears over job security and future income levels and that this as well as inflation is causing low economic growth in the UK.
Sir Mervyn said: “Households as a whole have been net savers, rather than net borrowers, for each of the past three years.”
However, the Governor also said policy initiatives were open to the Bank of England to keep interest rates low for some time and to increase the asset purchases programme of quantitative easing.
Inflation is falling, as the Bank of England predicted it would last year. Last week, the Consumer Prices Index (CPI) measure of inflation fell from 4.8 per cent in November, down to 4.2 per cent in December.
Sir Mervyn said that for the UK economy to grow and become healthy again, the economy needs to be rebalanced to reduce the amount we borrow from other countries. He said this needs to be done by increasing exports and importing less.
He said that there were signs this is happening as exports have increased by two per cent since 2007, though this is partly due to the weakening of sterling which has fallen in value by around 25 per cent against other currencies.
Sir Mervyn also made some comments on executive pay following the Business secretary, Vince Cable’s announcements of reforms on Monday.
Sir Mervyn said that companies needed to make fair pay awards to top staff the philosophies governing a market economy could be undermined.
"Those taking decisions on remuneration, in the financial sector and elsewhere, need to understand that a market economy rests not just on incentives, but on the acceptance that the distribution of rewards is fair. That sense of fairness underpins the commitment to a market economy."
With the banker bonus season soon to get underway and bosses from the taxpayer-owned Royal Bank of Scotland (RBS) meeting today to discuss remuneration packages for top staff, Sir Mervyn warned that “The legitimacy of a market economy will inevitably be challenged if rewards go disproportionately to a small elite, especially one which benefited from the support of taxpayers."
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