Bank in warning on eurozone crisis

 

Suggested Topics

The Bank of England painted a bleak economic picture for the UK today as it forecast a heightened risk of a double-dip recession and paved the way for another round of emergency measures.

Bank governor Sir Mervyn King sent a stark message to political leaders as he flagged an unresolved eurozone debt crisis as the "single biggest risk" to the economy.

But despite cutting forecasts, some experts accused the bank of being too optimistic and have predicted another multi-billion pound injection into the economy as early as next month.

In its quarterly inflation report, the bank slashed its central, or most likely, growth estimate to around 1% in both 2011 and 2012 - but compared to previous forecasts the Bank's projections reveal a greater chance of the economy shrinking in the first three quarters in 2012.

The forecasts assume the problems in the eurozone do not deepen, quantitative easing is maintained at current levels and interest rates stay at record lows.

The worsened prospects for the UK economy mean inflation is likely to fall far quicker than previously estimated, hitting the Government's 2% target in the second half of next year before falling to as low as around 1.3% in 2013.

Sir Mervyn, who was formally knighted at Buckingham Palace yesterday, said UK economic activity will be broadly flat until the middle of next year and added that the country faces a "difficult economic environment".

The bank's report backs the City's view that interest rates will be kept on hold for the foreseeable future and another round of quantitative easing (QE) will be rolled out before February.

But some economists were still not convinced.

Vicky Redwood, chief UK economist at Capital Economics, said: "Even the bank's downgraded growth forecasts still look optimistic to us - we expect zero growth next year."

David Kern, chief economist at the British Chambers of Commerce (BCC), said: "The improvement in growth envisaged in the inflation report from the second half of 2012 appears too strong."

The bank cited weak global growth - in particular in the eurozone - as one of the key developments which influenced its decision to boost QE by a further £75 billion last month, increasing its total asset purchases to £275 billion.

The inflation report said: "Implementation of a credible and effective policy response in the euro area would help to reduce uncertainty and so support UK growth, but its absence poses the single biggest risk to domestic recovery."

But Sir Mervyn said the prospect of an improvement overseas seems "remote".

The bank added failure to meet the challenges in the euro area would have "significant implications" for the UK economy.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "While the inflation report and Sir Mervyn King did not specifically use the "R" word - recession - the implication is that this is a very real risk, particularly if events in the Eurozone worsen and credit conditions tighten."

But looking further ahead, the bank expects the economy to rapidly pick up to reach around 3.2% gross domestic product growth in late 2013.

Sir Mervyn added: "There will be weakness in the economy over the next few quarters and although no-one can know what the outcome will be thereafter, we expect the economy to pick up."

Looking at inflation, the bank said the rate would slow as the impact of the VAT rise, a fall in energy and import prices and downward pressure from a slack in the labour markets.

Elsewhere, the bank pointed towards the threat of a second credit crunch in the UK.

The turmoil in stock markets - triggered by uncertainty over the eurozone and global economy - has impacted banks' access to funding.

The bank said if these strains persist, the supply of credit to businesses and households could be restricted.

A Treasury spokesman said: "The Government is doing all it can to protect the UK economy and make sure that it remains a relative safe haven in the face of international instability and uncertainty, whilst also putting in place the longer term conditions needed for strong and sustainable growth."

PA

Independent Comment
blog comments powered by Disqus
Career Services

Day In a Page

The 50 Best beachwear

The 50 Best beachwear

The hottest summer gear for men and women
Still standing: George Galloway reveals why his staunchly Leftist outlook is still invariably right

Still standing: George Galloway

Written off, ridiculed, wrongly accused of taking bribes the honourable member for Bradford West, has never bowed to the critics.
How will Daniel Radcliffe's fans react to his latest turn - as a damaged, drug-taking Beatnik poet?

Daniel Radcliffe as drug-taking Beatnik poet

His decade as the boy wizard may be over, but that hasn't hexed Daniel Radcliffe's enchanted life.
For whom the bell tolls: £20m 'Memo' project takes shape on Dorset's Jurassic coast

'Memo' project takes shape on Dorset coast

It started as a stonemason's visionary idea – to commemorate all the species that have ever existed and are now extinct.
Just add sunshine: Bill Granger's Turkish delights

Just add sunshine: Bill Granger's Turkish delights

Turkish cuisine is perfect for those long, sociable weekend meals with friends. It's just a shame that money can't buy the key ingredient.
Objets czar: David Usborne’s collection of myriad objects is quite the mystery

Objets czar: David Usborne’s collection of myriad objects

To others, they're junk. To David Usborne, they are his life: useful gizmos, mysterious thingamajigs and anonymous articles that dominate his home.
The iron ore lady: Why the world's richest woman is mired in controversy

World's richest woman: Gina Rinehart

Family feuds, attempts to control the Australian media and bitter public disputes are keeping the mining magnate in the headlines.
We just click: How Lego keeps building on its success

How Lego keeps building on its success

This year, Lego announced record profits. Gerard Gilbert visits its Denmark HQ.
The other bits: Mark Hix creates delicious and economical meals with cheaper cuts of meat

Mark Hix cooks with cheaper cuts of meat

Our chef creates delicious and economical meals on a budget
Strokes of genius: How to create summer's bold make-up look

Strokes of genius: Summer's bold make-up

From coral lips to fly-away fringes, make-up artist Kim Brown and hair stylist Richard Scorer reveal how to create the look
Marking his territory: Kilian Hennessy creates fragrances designed to provoke the senses

Marking his territory: Kilian Hennessy

The perfumer creates fragrances designed to provoke the senses
Photo essay: Britain's 1948 Olympians today

Britain's 1948 Olympians today

Photo essay
The top five E3 2012 triumphs: From Ubisoft's suite of titles to Dishonored and The Last of Us

The top five E3 2012 triumphs

The games and moments that left us grinning like the Cheshire Cat
The green movement at 50: Can the world be saved?

Can the world be saved?

Population growth and climate change are the big problems facing the earth in the next 50 years. But are there any solutions?
France: Will xenophobia go mainstream?

France: Will xenophobia go mainstream?

In the beautiful Rhone delta, John Lichfield visits a village where a dangerous new political landscape is taking shape