The last week has seen increasing speculation that the recession might be over and recovery imminent, with a string of economic data and surveys suggesting that the pace of decline in the economy was slowing. Today's Inflation Report was therefore eagerly anticipated to see whether the Bank would cheer on the recovery or dampen our spirits again. Though its assessment refers frequently to the large amount of uncertainty around, the Report indicates that it its feet are placed firmly in the weak and slow recovery camp. The Bank expects the year on year contraction in the economy to peak at 4.5% in the summer with no return to real growth till next year. This will squeeze its target measure of inflation - the Consumer Price Index - to 0.5% by the end of the year.
Is the Bank right to be so gloomy? We believe it is. There are forces which are helping to reduce the severity of the recession and lay the basis for recovery - very low interest, fiscal stimulus, measures to support bank lending and a highly competitive pound. But the pressures that pushed the world and UK economy into recession are still strong. Though measures to shore up the banks have helped, lending conditions are still a long way from being normal. And despite retail sales being better than expected, rising unemployment, tighter credit, substantial losses in personal wealth and the fear of significant taxes are all good reasons for people to save more. While exports may get a boost as households start buying again, problems with export credit and the creeping fears of protectionism are likely to limit the recovery in world trade. So while things may have stopped getting worse as fast as they were at the start of the year, our economic glass is likely to remain half empty for the foreseeable future.