Sterling hit a five-year low against the dollar this morning after Mervyn King, the Bank of England’s governor, admitted that Britain was headed for a recession.
The pound is currently resting at just over $1.60, well off its $2.11 12 month high. The slide in sterling will likely make IT products more expensive in the UK, as kit and component prices are generally set in dollars.
Which is a pity, as cheap electronic goodies would be one of the few bright spots in what promises to be the grim, and boring economic downturn King has predicted.
The governor said the UK had taken a huge economic blow in recent weeks and pointed to the collapse of the Lehman Brothers in September that triggered “an extraordinary, almost unimaginable, sequence of events”.
“Not since the beginning of the First World War has our banking system been so close to collapse,” admitted King, who was speaking (pdf) to the CBI, Institute of Directors and the Leeds Chamber of Commerce last night.
King added that the economy has been in a tumultuous state since August 2007 – a period of time when many businesses were seemingly ignoring the credit crunch warnings haemorrhaging out of financial institutions last year.
The City’s fall from grace has been swift and dramatic. King said a number of factors have exacerbated Blighty’s current economic plight.
Growth in secured lending to households fell to an annualised rate of 1.9 per cent in the three months to August – its lowest level in more than a decade.
Meanwhile, banks have tightened the screws on credit to companies, and in some instances supply of finance to the UK corporate sector has ground to a halt, King noted.
All of that combined with rising food and energy costs led the Bank of England governor to conclude that “taken together, the combination of a squeeze on real take-home pay and a decline in the availability of credit poses the risk of a sharp and prolonged slowdown in domestic demand.
“Indeed, it now seems likely that the UK economy is entering a recession.”
King is now calling on bankers to be patient after the “excitement” of the past few weeks.
“I have said many times that successful monetary policy would appear rather boring,” he said. “So let me extend an invitation to the banking industry to join me in promoting the idea that a little more boredom would be no bad thing. The long march back to boredom and stability starts tonight in Leeds.” ®