RTTNews - Wednesday, Andrew Sentance, a member of Bank of England's Monetary Policy Committee said the recession in the U.K. might be bottoming out and we should be able to look forward to a recovery beginning either later this year or early in 2010.

He noted that the shift in the economic data was consistent with the variations in the balance of forces affecting the economy, although the exact timing and strength of recovery are unpredictable.

Sentance said in a speech in Aberdeen that the recovery should be underpinned by a continuation of the low and stable inflation, which is the key responsibility of the MPC. He stated, An underpinning of low inflation should help ensure that recovery can be sustained - which in turn is a key issue for business confidence and future prosperity in the longer term.

The policymaker noted several challenges ahead for the U.K. economy once the recovery starts. These challenges have some common characteristics with the situation witnessed in the 1990 recovery, he said. However, they also reflect unusual nature of the current global financial crisis.

According to Sentance, the most obvious challenge is the potential constraint on lending due to the reluctance of banks to lend as they try to rebuild their financial reserves. Of the two aspects of this in the U.K., one is the gap in lending supply created by the withdrawal of some foreign banks from lending to businesses. These foreign banks retreated to their home markets and are unwilling to lend in the U.K. The adverse impact of this could be offset by the U.K. based banks, but they too are likely to be much more cautious about future lending in the wake of significant losses arising from the financial crisis, he said.

The second challenge in the coming recovery will be the need for the British economy to rebalance its sources of growth after a period when economic activity has been strongly driven by financial activity and by a sustained period of rising public and private consumption.

The U.K. has a very large public sector deficit reaching around 12% of GDP this year and next, Sentance said. Fiscal consolidation will require restraint on the growth of public spending and, if taxes have to rise, it will have an impact on private consumer spending too, he added.

Britons should brace for a period when unemployment is probably higher than its natural or normal level for a while. He noted that based on the past experience of the U.K., it will take time for dynamic new industries to become established and replace jobs lost in the recession.

The British economy showed signs of stabilization as output rose in April and May, a report from the National Institute of Economic and Social Research or NIESR revealed Thursday. Gross domestic product recorded a 0.1% growth in May. In the three months ending May, output fell 0.9% compared to a 1.5% fall in the three months to April.

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