Bank of England: 'Supply chains may not recover'

14 June 2010

14 June 2010 | Lindsay Clark

The 2007 collapse in credit and subsequent recession may have caused permanent erosion of the UK’s supply chain, according to a study from the Bank of England.

The bank has assessed the state of supply capacity in an attempt to work out why inflation in the UK is stubbornly higher than in comparable economies.

“It is likely that the downturn has resulted in a fall in companies’ effective supply capacity although the magnitude of that impairment is difficult to gauge,” the bank said in its Quarterly Bulletin for the second quarter of 2010.

The report suggests that economic migration from the EU accession nations, including Poland, fell by 55 per cent from September 2008 to September 2009, suggesting businesses’ access to cheaper labour may have reduced.

Combined with restrictions in working capital available through credit, this has limited supply capacity, driving up inflation. In April, inflation rose to 3.4 per cent, according to the Consumer Prices Index measured by the Office for National Statistics. This is well above the 2 per cent target set by the UK government.

High inflation had been put down to increasing oil prices and a weak pound which drove up the cost of imports. But the Bank of England is suggesting it may have a more structural cause.

Whether the UK’s supply base will recover could depend on the economy. Robust growth could mean firms are compelled to return mothballed equipment to production and increase workers hours. Weaker recovery would mean the permanent cancellation of investment projects reducing the supply capacity.

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