Businesses in Birmingham would be harmed if the Bank of England overreacts to recession worries, the Birmingham Chamber of Commerce and Industry has said.
David Blanchflower, one of the nine members of the Monetary Policy Committee, said UK plc could already be in the first stages of a recession, and interest rates needed to be cut immediately to stop the economy shrinking.
But the Chamber said most sectors in Birmingham were still growing, and would not be helped by panic interest rate cuts.
Senior policy advisor Kate Teasdale said: “Its important to make the point that our businesses are still performing. We are in a challenging time, and we need to see interest rates handled sensitively.
“Recessions can be self fulfilling, and we have a responsibility to say what’s factually true. Investment would become more comfortable if interest rates were lower, and the retail and construction industries would probably want a cut. But if you look at exports and manufacturing we are seeing growth, so we don’t want to overstate the recession. Locally, businesses are still selling, and there is still growth.”
In an interview, David Blanchflower said: “I think we are going into recession and we are probably in one right now. We will probably have three or four quarters of negative growth, but the risks are to the downside.
“It’s not too late to stop it, but we have to act right now. Monetary policy has been far too tight for too long. We can’t just sit and do nothing as we have done for too long.”
He added the British economy could turn out to be in even worse shape than the American one, adding: “The US has had a big stimulus, but the UK has had none. So the same things that have been happening in the US will happen in the UK, but they could well be worse.”
He claimed both countries were facing the biggest economic challenge since the Great Depression.
Mr Blanchflower painted a grim picture of the economic future, saying house prices in Britain could fall by as much as third. The recent rises in unemployment, he said, were just “the tip of the iceberg” as job losses in house building combined with the financial sector and retail.
He said that the Monetary Policy Committee had to consider the medium-term price outlook and that inflation – which hit a series-high of 3.8 per cent in June – could fall sharply.
But Ms Teasdale said a more sophisticated response to the financial difficulties was needed. She said: “I think what most businesses would want in the short term is to see interest rates held.
“Businesses will be looking towards the pre-budget report, where we can see opportunities for the Government to create a tax system to take the pressure off business.”
She said there had been some encouraging signs, such as the Government’s u-turn over the unpopular 2p rise in fuel duty. But she said there was still much more that could be done to reform business taxes that would help the Birmingham economy continue to improve.
The Bank of England has held interest rates at five per cent for the last three months after cutting them in April despite signs of a sharply slowing economy, because inflation has nearly doubled the central bank’s two percent target.
Mr Blanchflower was the lone voice calling for a cut in interest rates in May and June.
Minutes of this month’s meeting will be published tomorrow, but Blanchflower is thought to have repeated his call for lower rates.