Rising price of oil could wreck UK's recovery from recession

Published on Friday 12 June 2009 22:13

CHANCELLOR Alistair Darling yesterday played down hopes that the recession had come to an end in Britain by warning that the rising price of oil could wreck any recovery.

Oil has risen to about $73 a barrel, more than double its price at the start of the year. Mr Darling said he was "confident but cautious" about economic recovery – and stuck to his Budget prediction that the country would pull out of recession at the end of the year.

Earlier this week, the National Institute for Economic and Social Research said the UK economy had seen growth return in April and May – suggesting the recession was over.

Voters are also more positive – in an opinion poll yesterday a third of respondents said Britain would fare well over the next year, and two-thirds predicted it would fare badly. In January, only 18 per cent of respondents were optimistic, with 79 per cent pessimistic.

Mr Darling warned that the price of oil "has the potential to be a huge problem as far as the recovery is concerned". Every $5 increase in oil puts about 2.5p on a litre of fuel.

In his Budget, Mr Darling predicted oil would average around $46.7 a barrel in 2009 – down markedly on 2008.

Encouraging signs include a modest rise in house prices and increasing numbers of new mortgages but fears remain over a jobless total still set for three million.

Mr Darling made clear the status of the banks was crucial to the economy. Part-nationalised banks such as Royal Bank of Scotland and Lloyds Group have committed themselves to increasing lending by 70 billion this year, and the Prime Minister has encouraged people who have been refused loans or mortgages to reapply.

In addition, the government believes the reduction in VAT to 15 per cent was a stimulus to consumer spending.

The Populus opinion poll, of 1,001 adults interviewed earlier this week, nevertheless contained bad news for Mr Darling and Mr Brown, who were less trusted than Tory leader David Cameron and shadow chancellor George Osborne to run the economy.

Mr Brown yesterday called a special meeting of the Cabinet to gather ideas for further reform of public services.

These initiatives – designed to regain the political initiative after a torrid few weeks are likely to form the basis of the government's draft legislative programme, to be published next month.