The UK economy will recover somewhat this year and the next, but the situation in the euro zone has big effects on it, Spencer Dale, a member of the Monetary Policy Committee and chief economist at the Bank of England, told CNBC in an interview on Wednesday.
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London Financial District
Figures released last week showed the UK economy fell deeper into recession than originally thought in the first quarter of this year with the Office for National Statistics saying gross domestic product shrank by 0.3 percent versus an initial estimate of 0.2 percent.
"Our central view is we will see some recovery this year through to the next year," Dale said.
"We may start to see some stabilization in consumption… that may help companies have the confidence to increase investment as well."
The euro zone crisis – with fears of a worsening of the debt crisis hammering European stock markets and the euro on Wednesday – has "significant implications" for the UK economy, as it saps household and business confidence, Dale said.
UK government bonds and the sterling have benefited from the euro zone's crisis to some extent, as the flight to safety has turned them into safe havens along with German Bunds and the U.S. dollar.
"I can see that there's some benefit in terms of increasing the attractiveness of sterling assets… but in the big picture, it has been dampening our economy," Dale said.
"I think there are political issues for the euro area… what matters for us is that the euro zone is able to address some of the issues," he added.
Headwinds
Over the past year and a half, the UK economy has had to deal with various headwinds such as an increase in value-added tax which inhibited consumption, a tightening fiscal policy, rising commodity prices and the crisis in the euro zone, Dale said.
"Monetary policy has been pushing back the other way," he said.
Analysts have called for more asset-buying – or quantitative easing – to boost the economy, but Dale said that not just demand has been weak over the past 18 months but also supply.
"If what we're seeing is as much a supply side problem ... Then more QE may not be the answer," he said.
Demand-side policies usually work by boosting aggregate demand, while supply-side policies act to boost productivity, increase education and training, encourage the unemployed back into work.
The pound, which depreciated by about 25 percent at the beginning of the financial crisis between 2007 and 2008, has been "very helpful" for the UK economy, Dale said.
"I think the current level of sterling is very helpful for what we want to see in terms of growth but also in terms of the pattern of growth," he added.
- Reported by Louisa Bojesen, Written by Antonia Oprita, CNBC.com
