Worst of downturn over but more pain expected – MPC

The worst of the economic downturn is over, but recovery is expected to be painful and sluggish, according to the Bank of England’s Monetary Policy Committee.

David Miles, the latest economist to join the committee, told the Treasury select committee the dire plunge in GDP in Q1 2009 will probably not be repeated, while house prices may not have much further to fall, The Guardian says.

However, millions of people will see their wages frozen or cut as companies fight for survival in the recession, he says.

"The prospect of a rapid return to growth does not seem a highly probable outcome, but there are reasons for thinking the period of the most rapid declines in output is behind us," says Miles.

He predicts the UK will return to growth of 2% to 2.5% a year, less than the 2.75% trend growth in recent years, but "not a bad outcome" nonetheless.

Data published last week showed the UK economy shrank by 2.4% in the first three months of 2009, marking a 4.9% plunge on a year-on-year basis.

Miles says: "It is sensible to assume a substantial proportion of that output has gone forever".

He also warns unemployment is likely to continue soaring and says it is "very worrying" youth unemployment is rocketing.

Miles says: "There are more and more examples of deals where pay cuts have been accepted; people are giving themselves a bit more job security by pricing themselves into their jobs. That is not easy - and nobody wants to see wages stagnant or falling. But it is better than even more rapidly rising unemployment."

Having predicted house prices were too high in 2006, he now has a "hunch" the UK has seen most of the overall aggregate house price falls.

The latest economic data suggests the UK could suffer a "W-shaped recession" followed by another contraction. Miles is wary of the optimistic view the economy will rebound strongly from the downturn in a "V-shaped recover," which he brands as "unlikely".

"Given the rapid fall in output at the end of 2008 and early this year, it may be the case that we get what looks like a rapid rebound. But that wouldn't tell us what might happen to GDP next year or beyond."