Bankers warn of double-dip slump in Britain

LONDON - The world's central bankers have warned that the British economy faces relapsing into another recession - the much-feared "double dip" downturn.

International economists say a continuing drought in bank lending, shown in the latest figures Bank of England figures, and the threat that soaring public borrowing will provoke higher interest rates and inflation combine to threaten a sustained recovery.

The Organisation for Economic Co-operation and Development (OECD), which comprises the 30 most advanced economies in the world, added to the gloom, saying that Britain remained "deep" in recession and faced a "bleak short-term outlook".

"The recovery is likely to be slow and unemployment is expected to climb significantly," it said, adding that the Treasury could do "considerably more" to fix the public finances.

Both warnings are at odds with recent market optimism and so-called green shoots suggesting output in the economy may be recovering.

But the Bank for International Settlements (BIS), which includes the Bank of England, the US Federal Reserve and the European Central Bank, said it feared the problems of the world's banks were far from fixed and could easily trigger a so-called "double dip" or "W-shaped" downturn.

"A major cause for concern is the limited progress in addressing the underlying problems in the financial sector," it said.

"A significant risk is therefore that the current stimulus will lead only to a temporary pick-up in growth, followed by protracted stagnation.

"Governments may not have acted quickly enough to remove problem assets from the balance sheets of key banks".

The BIS said financial products should be treated like medicines and sold to consumers only when they were certified safe, to help prevent a repeat of last year's financial meltdown.

Bank of England figures yesterday showed banks and building societies remain reluctant to lend to any but the most secure of businesses and home buyers.

Mortgage approvals barely improved during May, sticking at a little over 43,000 - some way above the nadir of 27,000 last winter, but under half of their normal level. Capital Economics analysts said the figures were "consistent with house prices falling at double-digit annual rates".

Detailed data on changes to the money supply indicated that relatively little of the £100 billion ($254.6 billion) pumped into the economy by the Bank of England through its policy of "quantitative easing", akin to "printing money", is finding its way as yet into meaningful lending by the banks to small businesses and first-time buyers.

A CBI survey published yesterday said more than 95 per cent of banks and building societies expected their bad debts to rise over the next few months.

Such write-offs will join the existing "toxic assets" on the banks' balance sheets and make them even less willing to take on riskier lending - the much feared "negative feedback loop".

- INDEPENDENT