Bank of England to cut growth forecast

The UK's economy will slow significantly as it is buffeted by the debt storms whipping the eurozone and US, the Bank of England will warn this week.

Bank Governor Sir Mervyn King is expected to say that GDP in 2011 will rise by about 1.3% - significantly less than the 1.8% it predicted in May, while its forecasts for next year could also be slashed.

The sluggish nature of the UK's recovery is expected to be made worse as panic sweeps global financial markets after America's prized AAA credit rating was slashed and worries persist that Italy and Spain could need a bail-out.

Meanwhile, business secretary Vince Cable told the Sunday Times that the UK is in danger of a double dip recession and said living standards will continue to come under pressure unless the banks boost growth by lending more.

His warning follows a week of mayhem on global stock markets in which the UK's FTSE 100 Index lost nearly 10% of its value, or £150 billion, in its worst period of trading since October 2008.

World leaders are reported to be breaking off from their holidays to hold emergency calls in an attempt to resolve the crisis and restore confidence that countries will not default on their debts.

The Bank of England has repeatedly downgraded its forecasts for the UK's economic growth in recent months as inflation squeezes consumer spending and the Government's austerity cuts begin to kick-in.

Earlier this year it predicted that the economy would grow by 2% in 2011 and three months ago it cut its forecast to 1.8%.

Business body the CBI and think-tank The National Institute of Economic and Social Research recently downgraded their forecasts for 2011 growth to 1.3% and the Bank is expected to follow suit on Wednesday. It comes after GDP growth slowed to 0.2% in the second quarter of 2011.

The Bank is also expected to lower its 2012 forecast from 2.5%, which economists fear is too optimistic.

Slower UK growth could put the Chancellor's deficit reduction plans in jeopardy by diminishing tax returns and increasing its unemployment benefit payments.

Howard Archer, chief economist at IHS Global Insight, said the Bank will also reveal that inflation will climb even further above the 5% it originally forecast although will fall back again next year.

The Bank has recently warned that the eurozone crisis could have an impact on the UK, particularly as there is uncertainty about how much banks have loaned to struggling eurozone countries, such as Greece. It is expected to say that the worries over the US and the global economy could also have an impact on the UK.