The pound plunged to a five-year low last night after Bank of England governor Mervyn King warned for the first time that Britain had entered a recession.
In his first public comments following a month of unprecedented turmoil, Mr King insisted that an extraordinary set of dangers are facing the economy and said it would be a 'long march' to recovery.
Not since the First World War has the banking system come so close to collapse, he said.
His comments sent the pound tumbling against the dollar by 3 percent $1.71 to a five-year low of $1.62.
And the governor hinted that further interest rate cuts could be made in the coming weeks as the Bank of England tries to prop up the economy.
In a speech to business leaders in Leeds, Mr King said: '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.'
The supply of finance to firms has 'ground to a halt', families' access to credit has suffered a 'severe blow' and housing market weakness is 'likely to continue', he said.
Meanwhile, disposable incomes have already been pushed down because of rising food and energy prices.
Mr King went on: 'We now face a long, slow haul to restore lending to the real economy, and hence growth of our economy, to more normal conditions.'
His warnings will further damage Gordon Brown's claims to have put an end to 'boom and bust' and cast serious doubts over the Prime Minister's hopes of spending his way out of recession.
However Mr King struck a note of optimism by suggesting that this month's £37billion bail-out of Royal Bank of Scotland, Lloyds TSB and Halifax Bank of Scotland was the moment when 'we turned the corner' in the financial crisis.
Yet the country will never return to the days of free and easy lending that prevailed until August last year, he warned.
This clashes with assurances from ministers that firms benefiting from taxpayer cash will supply at least as much credit as they did in 2007.
Mr King's intervention came as the respected National Institute of Economic and Social Research warned Britain is likely to suffer a recession lasting at least a year.
The gravity of the situation was underlined by separate figures showing industrial production has dropped in the past month.
Confidence among manufacturers is now at its lowest ebb since the early 1980s, the Confederation of British Industry said.
Mr King has previously refused to speak of recession, but his decision to do so last night reflects the sharp plunge in Britain's economic fortunes over recent days.
A recession is defined as two or quarters of falling economic output. The last time this happened was under Conservative Prime Minister John Major in the early 1990s
The economic situation has become so dire that the Bank of England cut interest rates by a half point, to 4.5 per cent, at the beginning of October following similar moves by the U.S. Federal Reserve and European Central Bank.
Last night economists from NIESR published their report called The Great Crash of 2008. It warned there were no 'magic solutions' to prevent recession.
The research body, which counts the Bank of England and Treasury among its clients, said Britain entered recession over the summer and may not emerge until 2010.
Yet the Government can do little to ease the pain, NIESR said.
It gave short shrift to Mr Brown's pledges to spend his way out of recession, saying it will take a long time to bring forward investment plans.
Government borrowing could exceed £100billion, and this money will have to be paid back eventually, the report said.
Meanwhile banks are unlikely to heed Treasury calls for lending to be lifted to 2007 levels it added, calling this ministerial 'rhetoric'.
And NIESR said rate cuts were less 'powerful' than they used to be because banks are refusing to pass them on to customers. continues here
In his first public comments following a month of unprecedented turmoil, Mr King insisted that an extraordinary set of dangers are facing the economy and said it would be a 'long march' to recovery.
Not since the First World War has the banking system come so close to collapse, he said.
His comments sent the pound tumbling against the dollar by 3 percent $1.71 to a five-year low of $1.62.
And the governor hinted that further interest rate cuts could be made in the coming weeks as the Bank of England tries to prop up the economy.
In a speech to business leaders in Leeds, Mr King said: '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.'
The supply of finance to firms has 'ground to a halt', families' access to credit has suffered a 'severe blow' and housing market weakness is 'likely to continue', he said.
Meanwhile, disposable incomes have already been pushed down because of rising food and energy prices.
Mr King went on: 'We now face a long, slow haul to restore lending to the real economy, and hence growth of our economy, to more normal conditions.'
His warnings will further damage Gordon Brown's claims to have put an end to 'boom and bust' and cast serious doubts over the Prime Minister's hopes of spending his way out of recession.
However Mr King struck a note of optimism by suggesting that this month's £37billion bail-out of Royal Bank of Scotland, Lloyds TSB and Halifax Bank of Scotland was the moment when 'we turned the corner' in the financial crisis.
Yet the country will never return to the days of free and easy lending that prevailed until August last year, he warned.
This clashes with assurances from ministers that firms benefiting from taxpayer cash will supply at least as much credit as they did in 2007.
Mr King's intervention came as the respected National Institute of Economic and Social Research warned Britain is likely to suffer a recession lasting at least a year.
The gravity of the situation was underlined by separate figures showing industrial production has dropped in the past month.
Confidence among manufacturers is now at its lowest ebb since the early 1980s, the Confederation of British Industry said.
Mr King has previously refused to speak of recession, but his decision to do so last night reflects the sharp plunge in Britain's economic fortunes over recent days.
A recession is defined as two or quarters of falling economic output. The last time this happened was under Conservative Prime Minister John Major in the early 1990s
The economic situation has become so dire that the Bank of England cut interest rates by a half point, to 4.5 per cent, at the beginning of October following similar moves by the U.S. Federal Reserve and European Central Bank.
Last night economists from NIESR published their report called The Great Crash of 2008. It warned there were no 'magic solutions' to prevent recession.
The research body, which counts the Bank of England and Treasury among its clients, said Britain entered recession over the summer and may not emerge until 2010.
Yet the Government can do little to ease the pain, NIESR said.
It gave short shrift to Mr Brown's pledges to spend his way out of recession, saying it will take a long time to bring forward investment plans.
Government borrowing could exceed £100billion, and this money will have to be paid back eventually, the report said.
Meanwhile banks are unlikely to heed Treasury calls for lending to be lifted to 2007 levels it added, calling this ministerial 'rhetoric'.
And NIESR said rate cuts were less 'powerful' than they used to be because banks are refusing to pass them on to customers. continues here
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