Mervyn King warned of tougher times ahead for economy

The economy is facing tougher times ahead but is not on the verge of a slump, Bank of England governor Mervyn King has said.

Although the credit crunch has put the squeeze on the housing market, Mr King said consumer spending so far this year was "surprisingly resilient" and the UK's "modest" slowdown contrasted with a more dramatic decline in the US.

"This is not an economy which has completely ground to a halt," Mr King said. "What is so marked is the difference in sentiment between the people running their businesses and the financial sector - the difference between the real economy and the financial sector."

Mr King admitted that if the fragility in financial markets persisted, the consequences would be "more serious", but predicted stable house prices as the boom of recent years recedes.

He said: "I would be surprised in a few years if house prices are markedly higher than they are now. House prices should be more in line with average earnings."

This contrasts with more gloomy data from the US this week which showed a fall of more than 11% in average house prices in the year to January.

The current pain of the banking sector also sparked calls from Labour MP Jim Cousins for aid to the thousands of homebuyers facing the impact of higher mortgaging and remortgaging costs.

But the Bank's chief economist Charles Bean replied: "Repossessions are still at a very low level, it is important to keep that in mind. The vast majority of people are not having trouble paying their mortgage. We are not at the juncture yet where special measures are necessary. Where we are at the moment is not a situation of extreme slump."

Mr King also warned households would come under pressure this year as wages failed to keep up with soaring costs of food, petrol, and household energy bills. He said: "As a nation, our standard of living is going to rise much less quickly than if these price rises had not increased."

But he stressed that the Bank's Monetary Policy Committee was focused on the risk of heightened inflation expectations feeding into wage demands, adding: "We can't afford to go back to the 1970s or early 1980s."