Bank to downgrade growth forecast

The UK's economic forecasts will be slashed by the Bank of England tomorrow for the second time this year, adding to fears that the recovery is in jeopardy.

The Bank's quarterly inflation report is expected to predict that GDP in 2011 will rise by significantly less than the 1.8% it estimated in May, while next year's figures may also be downgraded.

But its calculations will not take into account the recent stock market meltdown, which has seen the FTSE 100 Index lose nearly 16% of its value, or £250 billion, in the past two weeks.

The mayhem in financial markets could further weaken the UK's economy by destroying consumer and business confidence, raising the risk of a global recession, its governor Sir Mervyn King is expected to caution.

The Bank's Monetary Policy Committee has recently warned that the eurozone crisis could hurt the UK by dampening demand for exports.

It was particularly concerned by uncertainty about how much banks have loaned to struggling eurozone countries, such as Spain and Italy.

The Bank is now expected to say that the worries over the global economy and the resulting stock market slump could further endanger the recovery.

Sir Mervyn will be quizzed about whether more quantitative easing is needed to boost the stuttering economy.

Victoria Cadman, an economist at Investec Securities, said: "The recent turbulence in financial markets across the globe, if it persists, is likely to weigh on consumer and business sentiment, slowing any recovery in demand and business investment and risking an even slower recovery.

"If a similar story plays out globally the UK might find its export partners less keen to come shopping for UK goods, applying a further brake to the UK's recovery prospects."

The Bank of England has repeatedly downgraded its forecasts for the UK's economic growth in recent months as inflation batters households and the Government's austerity cuts 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 would upset the chancellor's deficit reduction plans 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 it will fall back again next year.