At last, Bank chief admits: it really is a recession

• Ashley Seager
• The Guardian,
• Wednesday October 22 2008
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Bank of England governor Mervyn King speaks to members of the chamber of commerce in Leeds. Photograph: Darren Staples/Reuters

Bank of England governor Mervyn King last night admitted that Britain was entering its first recession since the early 1990s. He is the most senior figure to use the word recession since the slowdown began.

Against a backdrop of more bad news on the economy, King told a business audience in Leeds what most of them already knew - that the economy is shrinking.

"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 said.

"It is surely probable that the drama of the banking crisis, which is unprecedented in the lifetime of almost all of us, will damage business and consumer confidence more generally."

He did offer some hope of a further interest rate cut next month. With food and fuel prices falling, he said the biggest problem facing the economy is the downturn. Rates are 4.5% after this month's half-point reduction but many economists expect them to be cut next year to as low as 2.5% as the Bank seeks to prevent the recession being deep and prolonged.

The governor's comments came as the CBI's latest survey of manufacturers revealed confidence at its lowest ebb since July 1980 when Britain was about to enter another recession. Output and orders were collapsing, the survey said.

The gloomy picture was completed by thinktank the National Institute for Economic and Social Research saying that Britain entered a recession in the third quarter of the year and warning that the slump will probably last for a year or more, making it as painful as those of the early 1990s and early 80s.

Taking stock of weeks of "unprecedented" turmoil in the financial markets, King said a collapse of the world's banking system had only narrowly been avoided. "Following the failure of Lehman Brothers on September 15, an extraordinary, almost unimaginable sequence of events began which culminated a week or so ago in the announcements around the world of a recapitalisation of the banking system.

"Not since the beginning of the first world war has our banking system been so close to collapse."