Signup for our free newsletter:

Mervyn King Warns of a "sharp and prolonged slowdown"

Written By Brian Hicks

Posted October 22, 2008




The story across the pond is worsening. First in England and then with the Euro.

The pound is plunging by its biggest margin in 16 years against the dollar and the FTSE 100 has tumbled.

A warning by Mervyn King, the Governor of the Bank of England, on the economy has sent both of them reeling.  A recession, King says, now looms large.

From Bloomberg by Brian Swint and Jennifer Ryan entitled: King Says Bank of England Will Act as Recession Seems Likely

“Bank of England Governor Mervyn King said Britain’s worst banking crisis since World War I is likely to push the economy into a recession, requiring policy makers to act “promptly” to prevent inflation from slowing too much.

“The combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand,” King said in a speech to executives in Leeds, England yesterday. The Monetary Policy Committee “will act promptly to ensure that inflation remains on track to meet our target.”

King said house prices will continue to fall and the pound may depreciate further in his first explicit acknowledgement that a U.K. recession is likely. The financial crisis led Gordon Brown’s government to bail out the British banking system and will push the economy to its first full-year contraction since 1991, the National Institute of Economic and Social Research said today.

“We are far from the end of the road back to stability,” King said. “But the plan to recapitalize our banking system, both here and abroad, will I believe come to be seen as the moment in the banking crisis of the past year when we turned the corner.”

Manufacturing confidence is at the lowest since 1980, the Confederation of British Industry said yesterday, and house prices fell at the biggest annual rate in at least six years this month, Rightmove Plc said Oct. 20. Gross domestic product will fall 0.9 percent in 2009 and consumer spending will drop 3.4 percent, Niesr, whose clients include the central bank, said today.

“Over the past month, the economic news has probably been the worst in such a short period for a very considerable time,” King said. “Indeed, it now seems likely that the U.K. economy is entering a recession. The balance of risks to inflation in the medium term shifted decisively to the downside.”

“Not since the beginning of the First World War has our banking system been so close to collapse,” King said. “It would be a mistake, however, to think that had Lehman Brothers not failed, a crisis would have been averted. The underlying cause of inadequate capital would eventually have provoked a crisis of one kind or another somewhere else.”

A global recession is now a given.  It will be interesting to see if the European Union can survive its first real test.

By the way, the euro is dropping like a stone.

Take a look. It’s a chart of the FXE—an ETF tied to the currency. As it goes down the greenback goes up. 



Here’s a bet that the Euro is headed for parity over time. Shorter term, it needs to hold 1.26. If not it falls to 1.20.  The good news is that oil will fall right along with it.