Bank in warning on eurozone crisis


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."


Suggested Topics
Start your day with The Independent, sign up for daily news emails
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Treasury Assistant - Accounts Assistant - London, Old Street

£24000 - £26000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Business Analyst - Financial Services - City, London

£50000 - £55000 per annum: Ashdown Group: Business Analyst - Financial Service...

SThree: Trainee Recruitment Consultant

£18000 - £23000 per annum + OTE £45K: SThree: At SThree, we like to be differe...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + competitive: SThree: Did you know? SThree is the o...

Day In a Page

General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence
Public relations as 'art'? Surely not

Confessions of a former PR man

The 'art' of public relations is being celebrated by the V&A museum, triggering some happy memories for DJ Taylor
Bill Granger recipes: Our chef succumbs to his sugar cravings with super-luxurious sweet treats

Bill Granger's luxurious sweet treats

Our chef loves to stop for 30 minutes to catch up on the day's gossip, while nibbling on something sweet
London Marathon 2015: Paula Radcliffe and the mother of all goodbyes

The mother of all goodbyes

Paula Radcliffe's farewell to the London Marathon will be a family affair
Everton vs Manchester United: Steven Naismith demands 'better' if Toffees are to upset the odds against United

Steven Naismith: 'We know we must do better'

The Everton forward explains the reasons behind club's decline this season
Arsenal vs Chelsea: Praise to Arsene Wenger for having the courage of his convictions

Michael Calvin's Last Word

Praise to Wenger for having the courage of his convictions