King calls for rebalancing of UK economy in sober decade

• Mervyn King said the coming few years would be a 'sober decade' for the UK Picture: Getty

Mervyn King said such a move would be against the backdrop of a coming "sober decade" in contrast to what economists have called the Goldilocks economy from the early 1990s to the early 2000s. That period was characterised by very low inflation combined with consistent economic growth.

King, speaking to business leaders, said: "After an unprecedented financial crisis and deep recession, the UK economy needs to rebalance."

He said in the coming years Britons would have to save more, even though the immediate concern was to ensure a recovery in consumer demand.

"So the case for rebalancing is even stronger in the wake of the financial crisis and recession that followed the nice decade," he told a West Midlands audience.

"To achieve a rebalancing we need to sell more to, and buy less from, economies overseas. To close the gap between exports and imports, more than half a million jobs will probably need to be created in businesses producing to sell overseas - compensating for fewer employment opportunities serving UK consumers or the public sector."

He said such an adjustment to the UK economy was unlikely to be smooth. "Unless the fall in domestic spending coincides with the necessary increase in net exports, the path for the economy will be bumpy."

Total UK output was roughly 10 per cent below where it would have been had the financial crisis not occurred, he said. The conditions were in place to support a rebalancing of the UK economy. He said that "in particular the past depreciation of sterling will make UK-produced goods more competitive at home and abroad".

However, the governor warned the biggest risk to an orderly rebalancing of the economy was from overseas. "Efforts to restore world demand are impeded by the scale of the imbalances in trade, which are beginning to grow again.

"Lower domestic demand in the deficit countries must be accompanied by strong growth in domestic demand in the surplus countries if the world economy is not to slow. That will require a change in the strategy of those countries that have built their own policies around export-led growth."

The governor said the need for countries to act in the collective interest had yet to be recognised, and that unless it was it would only be a matter of time before protectionism reared its head.

"That could, as it did in the 1930s, lead to a disastrous collapse in activity around the world. Every country would suffer ruinous consequences including our own," King said.

He added: "The next decade will not be nice.

History suggests that after a financial crisis the hangover lasts for a while. So the next decade is likely to be a sober decade - a decade of savings, orderly budgets and equitable rebalancing." x