UK will beat US and Germany to recovery, says Bank's new recruit

The UK economy should return to growth by 2010, but the road to recovery will be bumpy, the newest member of the Bank of England's monetary policy committee, Adam Posen, predicted today.

"I would be surprised not to have positive growth by 2010, possibly earlier but it's not going to be a smooth ride," the US economist told the cross-party Treasury select committee at his appointment hearing.

He said the UK was much closer to "beating the clock" than the US or Germany.

Posen, who is deputy director of the Peterson Institute, a Washington thinktank, will replace Tim Besley in September, moving to the UK to take on the role.

He told MPs there was even a possibility of the UK bouncing back to better-than-average growth rates over the coming months. "One has to hope for that," he said. "But I don't foresee the UK or any other major economy getting a smooth above-trend path for the next couple of years."

Sterling jumped against the euro after Posen said he expected to see the pound strengthen, compared with the single currency, once the immediate crisis was over. "The implication for sterling/euros is that I see stronger sterling against the euro in the medium term."

The euro slipped 0.3% to 85.78p after his comments, which came after new data showed that UK inflation fell to 1.8% in June.

Posen said policymakers would face tough decisions in the coming months about when to withdraw the costly life support from the part-nationalised banking system and when to start reining in public spending.

"You cannot indefinitely substitute government spending for private credit creation," he warned. "You can spend government money on a lot of things, but when you start using government money directly for credit uses it tends to be very inefficient."

However, he said fixing the banking system must be the first priority. "The complication is, first you have this political and social imperative that throwing a lot of money at the banks is not necessarily what you want to do first. Against that, if you can't fix the banks at some point, everyone in the economy suffers.

"You come back to this basic trade-off that you want to have the banks recapitalised and on a firmer basis before you withdraw fiscal stimulus."

Posen admitted some mistakes had been made by the UK's policymakers during the crisis. "Obviously, Northern Rock was not a shining moment for anyone in this system," he said.

However, he refused to be drawn on what specific changes to the regulatory structure that he would recommend. Instead, he urged the government to continue the debate about how to prevent banks becoming too unwieldy.

"I think revisiting the issue of having banks that are too big to fail is entirely relevant for the UK, and is worthy of some scrutiny."

The chancellor, Alistair Darling, has rejected the idea of dividing up "casino" type banks from ordinary high street lenders, choosing to rely on forcing complex banks to hold more capital instead. Report by Kathryn Hopkins and Heather Stewart Guardian website.

Published: 14.7.2009