THE UK’s financial crisis is set to continue for at least five more years, the Governor of the Bank of England said, as he issued a stark warning of more economic pain to come for Britons.
Sir Mervyn King said he was “pessimistic” over the chances for recovery among nations in the debt-ravaged eurozone, saying the UK was not even “halfway through” the economic crisis that began in 2007.
His gloomy prediction came as he told MPs that he was “struck” by the speed at which the economic outlook was deteriorating as the eurozone crisis deepened, with conditions now worsening in previously booming areas such as Asia and other emerging markets.
He went on to warn members of Westminster’s Treasury committee during a hearing yesterday that his estimated time of how long the UK’s economic recovery would take was “expanding all the time”.
The Governor’s intervention was a “bleak warning” for Scotland’s economy, said Murdo Fraser, head of Holyrood’s economy committee, adding that five more years of pain would mean cuts to public services.
Sir Mervyn said he was “particularly concerned” as the problems in Europe continue without decisive action. Last night, ministers from Germany, France, Italy and Spain were holding talks in Paris to try to narrow differences on the eurozone’s future.
The Governor added: “Over two years now we have seen the situation in the euro area get worse and the problem being pushed down the road.
“There is just enormous uncertainty out there, I have no idea what is going to happen in the euro area.”
Sir Mervyn also confirmed he would be prepared to cut interest rates further if “that turns out to be necessary” and said the Bank had “not ruled out” a reduction to below 0.5 per cent.
However, he added that in view of multi-billion-pound measures being taken to boost bank lending, “a bank rate cut won’t make a difference”.
Mr Fraser said Sir Mervyn’s comments suggested economic recovery was being hampered by the eurozone crisis, which has seen bail-outs for to Spain, Greece, Ireland and Portugal.
He said: “This is another bleak warning from the Bank of England Governor about the country’s economic prospects and it’s once again clear that our economic recovery has been dragged down by the crisis in the eurozone because of our economies exposure to European markets.
“The opportunity for growth across the UK is always going to be limited until we see a turnaround in the eurozone situation.
“We are inevitably facing more years of austerity and difficult times for the public finances resulting from the ongoing eurozone difficulties.”
Mr Fraser said: “The outlook for the economy remains very challenging. It is unlikely that corporate investment will strengthen significantly until there is more clarity around the destiny of the eurozone, and the public spending squeeze is set to tighten further.
“However, exports of goods to markets outside the EU have been growing strongly, and next year we expect some strengthening in consumption as household incomes begin to rise again. We continue to forecast a slow return to health for the economy over the next few years.”
CBI Scotland’s assistant director, David Lonsdale, said investment was likely to be affected by Europe’s financial crisis, with spending on public services also under pressure.
He said the public spending squeeze was likely to” tighten further” due to the increasing uncertainty surrounding the eurozone crisis, after Cyprus also sought a bailout.
The Scottish Government called on UK ministers to fund a series of building and infrastructure projects north of the Border to boost the economy and create jobs.
A spokesman said: “Mervyn King’s comments reflect our view that a swift resolution to the eurozone crisis will require clear and decisive leadership, and that in challenging economic times it’s vital government does all that it can to support the economy.”
A Treasury spokesman: “The actions the government has taken to reduce the deficit and rebuild the economy have secured stability and positioned the UK as a relative safe haven, with interest rates near record lows, benefiting businesses and families.”