UK recession is over, says Bank as FTSE edges upward

Governor Mervyn King said: "Following a precipitate fall in economic activity at the end of last year and the start of this, there are now signs that growth has resumed in the third quarter."

But he warned the "strength and sustainability of the recovery is highly uncertain".

The FTSE 100 was 38.82 points higher at 5057.67, having having rallied from a post-Lehman low of 3512 which it slumped to in March.

It is still below the 5416 it closed at the session before Lehman went under.

King told MPs on the Treasury Select Committee: "The consequences of the financial crisis, sparked by the failure of Lehman Brothers exactly a year ago today, will be pervasive and long-lasting. That is not to say that growth cannot resume. In some countries it already has, and in others it will. But there is a long, hard road ahead."

The UK was already in recession when Lehman went bankrupt on 15 September 2008, but the pace of decline accelerated dramatically as the world was gripped by the worst financial crisis since the 1920s.

France, Germany and Japan have since emerged from recession but the UK is languishing behind.
King warned any recovery will be "slow and protracted".

He said: "Most financial institutions around the world are focused on recuperation, giving them a powerful incentive to be cautious about extending new credit to households and businesses. That is acting as a direct drag on demand. But the crisis has also caused households and companies around the world to want to strengthen their own financial positions and that has acted as a further brake on spending. Those factors will be important influences on the UK economy for the foreseeable future. Nevertheless, the decline in activity has moderated and growth seems set to resume."

His comments came amid warnings that the lessons of Lehman have not been learned — as illustrated by the return of big bonuses — and serious reform of the financial system is needed.

Tony Dolphin, senior economist at the Institute for Public Policy Research, said: "Alarm bells should be ringing with the early signs of a back-to-business attitude in the City and little evidence that policy makers are taking measures to ensure the next economic recovery is better balanced than the last one."

The mood in London and New York today was in stark contrast to a year ago when the FTSE 100 1index crashed more than 200 points or nearly 4% on the day of Lehman's downfall.

Volatility warning from Mervyn King

Mervyn King today warned the path of inflation will be "volatile" after it fell less than expected again last month.

The Consumer Prices Index fell from 1.8% in July to 1.6% in August - its lowest since January 2005 but above the 1.4% forecast in the City.

King, Governor of the Bank of England, predicted six months of volatility with inflation initially falling further below the 2% target before rising temporarily when last year's emergency VAT cut is reversed.

Further out, he forecast inflation to drop back below 2%, suggesting yet more money will be printed by the Bank under its quantitative easing programme.

Vicky Redwood of Capital Economics said: "The big picture is still that inflation is set to fall to very low levels next year and beyond."