Top Banker Says U.K. Recovery Will Be Slow

hartmannsliebe

The U.K.'s top central banker poured cold water on hopes for a quick recovery of the country's economy, saying much will depend on how quickly banks can raise the capital they need to resume normal lending.

Mervyn King, governor of the Bank of England, said that predicting the country's economic outlook has become 'extraordinarily difficult' and that any rebound is likely to be slower than previously thought.

One big problem, he said, is that a tentative recovery in bank lending hasn't been enough to compensate for an exodus of foreign lenders triggered by the financial crisis. To fill the gap, he said, U.K. banks will have to raise more capital than they already raised, though how much will be enough isn't clear.

'The economy will eventually heal, but the process may be slow,' Mr. King said, holding out the possibility that the U.K. could remain in recession through 2011. 'There are real risks from the nature of the downturn and the role of the financial sector.'

Mr. King's concern about banks underscores a problem facing all of Europe: Banks are still a long way from raising the cash they will need to cover further losses and maintain their capital at healthy levels. The International Monetary Fund estimates European banks still need to raise some $600 billion. Of that total, U.K. banks need to raise $125 billion, the fund estimates.

To be sure, banks in the U.K. have been more aggressive in raising capital than their counterparts elsewhere in Europe. Data from the IMF suggest they have raised more than half the total required to cover their losses from the entire financial crisis, compared with only about 40% for European banks as a whole and nearly two-thirds for U.S. banks.

The Bank of England's gloomy outlook contrasts with a string of relatively upbeat economic data that had fueled investors' hopes for a more rapid recovery. Retail sales in April rose at their fastest annual rate in three years, while the number of people claiming jobless benefits rose a less-than-expected 57,100 in April. A recent Bank of England survey showed banks ready to boost lending for the first time in more than a year, suggesting that government capital injections and the bank's efforts such as lowering interest rates to a record low are working.

Mr. King acknowledged the positive signs, saying that the U.K.'s stimulus programs, together with a cheap pound, are 'solid reasons' to expect an economic recovery.

The bank's outlook is darker than that of the U.K. Treasury, which expects the economy to return to growth at the end of this year and be growing at a rate of 3.5% by 2011.

Alistair MacDonald / Natasha Brereton