New warning on UK economy

Britain's economy is still not out of the woods, the Bank of England will say later this week, according to the Daily Telegraph. The Governor, Mervyn King, is to issue the warning when the Bank releases its latest Inflation Report on Wednesday in an indication of the reasons behind the extension of the quantitative easing programme last week.

Although King will say that the worst of the recession is over, he will warn that the slow-down in bank lending to both companies and consumers will cause continuing financial pain. Growing unemployment and rising mortgage costs will also impact the country's households.

In its statement last week, which accompanied the decision to increase its money-printing operation, it said the recession has been worse than expected and money supply remained weak. It noted at the time: "While some recovery in output growth is in prospect, the margin of spare capacity in the economy is likely to continue to grow for some while yet, bearing down on inflation in the medium term."

A separate warning has been made by former Monetary Policy Committee member Sushil Wadhwani – now a hedge fund manager – that the UK could be heading for a "lost decade" like that experienced by Japan in the 1990s.

He said that evidence was increasing that Britain may be following in the tracks of the world's second-biggest economy, with initial signs of recovery leading instead to long-term stagnation.

WHAT THEY ARE SAYING:Sushil Wadhwani in the Daily Telegraph: "The second half of 2010 could be more difficult for the UK than 2009. There will be a big fiscal tightening, the VAT tax cut will have gone; and the world as a whole will be slowing at that point. You will have several things coming together which will dampen the economy."

Ashley Seager in the Guardian: "King… knows the danger of withdrawing the stimulus too quickly and tipping the economy into a renewed slump – a W-shaped recession – or even a lost decade like the Japanese suffered after their slump of the early 1990s. He wants to go down in history as the guy who got us out of this mess, not the one who made it worse." ·