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Economic worries look set to continue

Recession worse than early 1990s downturn

Graph with coins

Risk-free investment can be affected by interest, tax and inflation

The UK’s current recession is “very likely” to be worse than that of the early 1990s, a Bank of England rate-setter has said.

Kate Barker, a member of the Bank’s Monetary Policy Committee (MPC) gave the warning at a speech to businesses in south London last week.

The UK economy shrank by 2.5% between mid-1990 and 1991. Ms Barker said: “It seems very likely that the loss of output in this recession will exceed that of the early 1990s.”

The gloomy prediction leaves the UK on course for its worst contraction since the early 1980s, when output fell 6%.

But Ms Barker added that comparisons with previous recessions were “not terribly helpful”, due to the woes faced by much of the financial system and the co-ordinated extent of the downturn across the globe.

She said it would “not be easy” to boost confidence but said the Bank was working “limit the social and economic costs” of the recession.

£75bn pumped into the economy

The Bank this week kicked off plans to pump £75bn in newly created money into the economy under so-called quantitative easing (QE) – effectively printing money.

The move came after slashing rates to an all-time low of 0.5%, hitting savers and banks. Although the stimulus effects of these cuts have yet to be felt, Ms Barker said another policy tool was “clearly required”.

She said the Bank recognised the “adverse” impact of the rate cuts on savers, but added that the risk to the economy of doing nothing outweighed the pain.

“In reaching our decision last week, the MPC had to weigh these adverse effects against the potential costs of inaction in terms of lower growth, an even sharper rise in unemployment and the risk of deflation,” she added.

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