–Posen: Prospects For Euro Area Growth Next Few Years “Rather Dim”
–Posen: UK Fiscal Stimulus Impact Will Be More Limited Than In Japan
–Posen: Ending Fiscal Stimulus Will Be Painful For GDP Growth
–Posen: UK Fiscal Discipline Won’t See Bonus From Interest Rates

LONDON (MNI) – Bank of England Monetary Policy Committee Adam Posen
highlighted some of the challenges facing the UK economy on its path to
recovery, citing the “rather dim” growth prospects in the euro area and
the fact the BOE cannot respond to tighter fiscal policy by cutting Bank
Rate any further.

In a speech at the London School of Economics, Posen said that
fiscal discipline was more about pre-empting a rate rise.

Posen looked at the comparisons between the UK’s economic outlook
and that of Japan in its lost decade, and said if it was a film, the UK
remake could end up in some ways being scarier than the original. He
noted policymakers are hoping the UK would see strong exports, but with
its largest export market – the euro area – struggling, exporters face a
tough challenge trying to boost business volumes elsewhere.

Posen also put the spotlight on the limitations of the UK’s fiscal
stimulus. He said the fiscal multiplier was lower in the UK than in
Japan, and while declaring an end to the stimulus here – with the
government now committed to fiscal tightening – was a sound policy it
would hit economic growth.

“The UK’s major export market remains the Euro Area … Let us just
say that the prospects for strong growth in most of the Euro Area are
rather dim for the next several years, as are the prospects for a
sustained relative price adjustment by the UK against the Euro Area,”
Posen said.

“The UK faces a double-limitation on export-led growth in
comparison. First, with most of the Western economies in recession,
there is more competition for export markets, and presumably at some
point the US, too, will have to close its trade deficit,” Posen said.

While recent business surveys have shown UK business responding
well to changing demand, Posen noted the challenge of maintaining
momentum.

Posen warned that the UK’s fiscal stimulus may not end up
providing as strong boost to the economy – with the country having
already come up against its effective limits on fiscal policy easing.

“Fiscal stimulus will be more limited in its effect and less
sustainable on a large scale in the UK than it was in Japan,” he said.

“The multiplier on Japanese fiscal stimulus was higher than it has
been in the UK. The upshot is that declaring a limit on fiscal stimulus
in the UK well before Japan should have is sound policy, yet no one
should doubt this will be painful in terms of aggregate GDP growth,” he
said.

With Bank Rate already set close to the zero bound, at 0.5%, Posen
said the central bank cannot respond to fiscal tightening with further
rate cuts, but only delay a rise.

“Given where interest rates are now, there will be no bonus from
fiscal discipline. This is about pre-empting an interest rate rise,” he
said.

–London newsroom: 4420 7 862 7491; email:
dthomas@marketnews.com/drobinson@marketnews.com

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