UK economy is 'cratering', warns economist

Living standards will drop, the UK economy is "cratering" and growth will fall to only 0.5 per cent next year, well below the Government's official projections, warned Adam Posen, a member of the Bank of England's interest-rate setting Monetary Policy Committee.

He was speaking exclusively to The Independent in his first interview since prevailing in his personal crusade to persuade members of the MPC to restart the Bank of England's £200bn quantitative-easing programme.

"I'm glad the committee has decided to recognise the British economy is cratering and we have a responsibility to do something about it," he said.

The American economist predicted that, partly thanks to the extra £75bn of government bond purchases announced by the MPC on 6 October, the UK will not slip back into recession. But he laid out an extremely pessimistic forecast for growth in the UK.

"I'm saying roughly 0.5 or below for 2011 and 0.5 or above for 2012," he said. In March, the Office for Budget Responsibility forecast growth of 1.7 per cent for 2011 and 2.5 per cent for 2012.

Mr Posen warned living standards will fall as a result. That conflicts with the relatively upbeat forecast from the Bank of England Governor, Sir Mervyn King, who told ITV that Britain was "past the worst" in terms of squeezed incomes.

Before this month, Mr Posen had been a lone voice on the MPC in favour of extending quantitative easing. But, after a flood of economic data and the intensification of the eurozone debt crisis, the MPC voted unanimously to extend the Bank's asset purchase scheme by £75bn. The MPC also said it would keep the programme under review.

It has been accused by some analysts of ignoring its mandate to keep consumer price inflation close to a 2 per cent target. Last month, CPI reached 5.2 per cent.

But Mr Posen is adamant inflation will fall sharply next year as this year's VAT increase works its way out of the figures and commodity prices fall. He also argues the main reason for high inflation at the moment is the decision of the energy regulator, Ofgem, to allow the big six power firms to increase prices.