Bank of England: Britain is heading for recession

The Governor of the Bank of England, Mervyn King, did not utter the "R-word" yesterday, but his message could not be clearer. Britain is heading for recession: official. Mr King predicted a year of "difficult and painful adjustment" with the economy stagnating for much of 2009, and living standards showing little, if any, improvement.

Launching the bank's quarterly Inflation Report, its definitive view of prospects for the economy, Mr King also said there was little the Government could do about the housing market, just as ministers are floating various "rescue" schemes. He added: "It's bound to be the case that there is the possibility of a quarter or two of negative growth," satisfying the conventional economic definition of the term "recession".

It is a possibility that has not yet been conceded publicly by ministers trying to stay upbeat in the face of mounting economic woes. More serious still are the implications for already-stretched public finances. The director of the independent Institute for Fiscal Studies, Robert Chote, said the downturn would mean "the Government will end up having to borrow significantly more than expected". Lower growth, as Mr King made clear, means less income from taxation and higher spending on social benefits, which will also become more costly when they are uprated by inflation in September.

Inflation is forecast by the bank to peak at about 5 per cent in the autumn, more than double the Government's target of 2 per cent. With the Treasury's existing plans based on Budget forecasts of growth of 2.5 per cent in 2009, a reduction to zero means the Chancellor, Alistair Darling, faces a £12bn "black hole", and the near-certainty that the Treasury's fiscal rules will have to be modified. The Government's much-mooted "Economic Recovery Programme" to rescue the housing market and the pre-Budget report are being prepared against a rapidly worsening backdrop.

Figures yesterday showed the largest rise in unemployment during the downturn, with a jump of 20,100 in the official jobless figures in July, the sixth successive monthly rise, bringing the increase in unemployment since the credit crunch began to 70,000. Total unemployment stands at 1.67 million, a rate of 5.4 per cent, up 0.2 per cent on the month. Some City economists see unemployment reaching 2.5 million next year, a figure frighteningly reminiscent of the worst conditions of the 1970s and 1980s. John Philpott, chief economist at the Chartered Institute of Personnel and Development, warned there was worse to come. "Employment growth has ebbed to a trickle – indeed employment has fallen in several regions – while the rise in unemployment is gaining worrying momentum."

Paul Kenny, general secretary of the GMB union, said: "The figures are a tragedy and hide the misery for tens of thousands of households where people lose their jobs." The CBI's director general, Richard Lambert, said: "The economy is losing momentum, but with inflation set to rise to 5 per cent or more in the short term, there is little room for interest rate cuts in the immediate future." But the prospect that a weak economy will leave the Bank of England scope to cut rates rapidly next year led to a sell-off of sterling, adding to the 12 per cent depreciation in the value of the pound since last summer.

The Work and Pensions minister, James Plaskitt, said: "The welcome news is that the numbers on incapacity benefits and lone-parent benefit continue to fall as our reforms kick in." He added that "there are still 380,000 more people in work than a year ago".

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