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Expert warns over 'lost decade' threat to economy

The struggling UK economy is still in danger of slipping into a Japan-style “lost decade”, a former Bank of England rate-setter said this week.

The warning from Sushil Wadhwani, a former member of the Monetary Policy Committee, comes ahead of the Bank’s latest economic forecasts on Wednesday.

These are expected to show worsening UK growth prospects and a threat of long-term deflation after the Bank elected to pump an extra £50 billion into the economy last week.

Despite tentative signs of recovery, Mr Wadhwani told the Daily Telegraph the economy could dip down again next year after a brief bounce - following a similar pattern to Japan in the early 1990s.

“People think things will then return to normal - but these bounces are driven by temporary factors - for instance, destocking turning to restocking, or factors like that you go only so long without replacing your car, or by the VAT stimulus.”

He added: “The second half of 2010 could be more difficult for the UK than 2009.”

Commenting on the UK’s economic recovery prospects, Paul Feechan, partner and head of audit at Deloitte in Newcastle, said: “The global economy may be out of intensive care but its future remains uncertain. History shows that the path to economic recovery is never smooth. It is almost always marked by setbacks and a faltering return to growth.

“We think improving credit conditions and stabilising the financial system are crucial to a return to growth. If these things are right, the economy is likely to recover.

Mr Feechan is more optimistic than Mr Wadhwani, however, saying that although many Chief Financial Officers think that the economy is on the mend, they also believe that many of the most difficult features of the recession will persist well into the recovery.

This was posted in Bdaily's Members' News section by Ruth Mitchell .