Bank of England: UK Recovery Depends on 'Successful Handover' from Household to Business Spending

The British economy must experience a "successful handover" in the medium term from consumer spending to business spending for sustained recovery.

According to the latest Bank of England minutes from its Monetary Policy Committee (MPC), domestic business spending would "play a crucial role in underpinning the recovery in the medium term".

Business spending had to be the engine of UK growth despite a volatile external environment in the eurozone for instance, said the MPC.

"The UK economy remained vulnerable to disorderly adjustment in the euro are and in some emerging economies," according to the minutes.

The government's austerity drive would continue to be a drag on UK economy, but there were some positives for businesses.

"To the upside, greater confidence in the recovery, together with an easing of constraints on credit supply, might lead companies to release some of the precautionary balances they had built up in recent years, either for redistribution back to households in the form of dividends, or to fund more vigorous increases in capital expenditure," it said.

"To the downside, the process of balance sheet repair in the household and banking sectors, alongside slow growth in real incomes, might put a brake on the rate of growth of consumer spending before a recovery in business investment had become established," it added.

"There were also risks surrounding wage and price-setting. It was therefore highly unlikely that growth and inflation would evolve exactly in line with the central projections, regardless of the conditioning assumption for Bank Rate."

Forward Guidance

The MPC voted unanimously to keep the bank rate at 0.5% and maintain the stock of asset purchases financed by the issuance of central bank reserves at £375bn ($604bn, €447bn).

The BoE's August 2013 forward guidance conditions - the unemployment rate falling below 7%, financial instability, inflation reaching 2.5% - had not been realised.