BBC’s Flanders warns of Japan-like conditions for UK

The UK could be entering a “profoundly different” era of slow growth and high debt reminiscent of the economic ills engulfing Japan, says the BBC’s economics editor Stephanie Flanders.

Speaking at a Cofunds economic forum in central London, Flanders said Britain's "misery index" is set to climb as a combination of slow growth, high inflation and weak credit growth take their toll on an economy in recovery mode.

"Britain's misery index is going up," she told delegates.

The respected economics commentator said there will be "no more Mr Nice Decade" - referring to the era of prosperity which marked out the noughties.

She said although fears of the dreaded double-dip recession have subsided, concerns surrounding slow growth pose real problems.

"The rate we recover at dictates what type of recovery we have," said Flanders.

She pointed to the dangers of following the slow-growth model adopted by Japan as it emerged from its economic crisis in the 1990s, with stunted growth fuelling company insolvencies and impacting labour supply.

"In terms of our debt, the same question arises as Japan," she said. "Are we entering a profoundly different era of lower growth and lower expectations? Debt is hanging over us and could play a role in how we get over the recession."

Adopting a different stance to Bank of England Governor Mervyn King's assumption inflation is a temporary phenomenon, Flanders said high inflation poses a "serious risk" to recovery as food and energy prices soar. She said the above-target figure underestimates the material pinch consumers feel in their pockets.

Commenting on the debate raging within the MPC over whether to hike interest rates, she said Charlie Bean, Paul Tucker and Paul Fisher are the most likely members to "switch" and vote in favour of a hike. At the last meeting, Andrew Sentance, Spencer Dale and Martin Weale all voted for an increase in the base rate.

She went on to say credit growth remains weak, real disposable income will fall in 2011 for the fifth year in a row and the economy is set for a further dose of monetary tightening.

"We had a lot of tightening in 2010 and we did not fall off the cliff - but there is a feeling this year could be the real crunch year," she said.

Despite setting out a number of headwinds facing the economy, Flanders also pointed to a number of positive economic indicators for delegates to take comfort from.

She said the UK economy lies in a healthy "starting position", with the country's annual growth performance between 1997-2010 outperforming a host of advanced economies including Germany and the US.

Flanders also said company balance sheets remain strong and hailed the "remarkably fast turnaround" in profit and insolvencies. The private sector, she added, will fuel a net increase in employment over the next five years.