Economy faces choppy waters, says Mervyn King

 

The UK economy will "zig-zag" in and out of growth this year but is heading in the right direction, Bank of England Governor Sir Mervyn King said today.

In its latest quarterly inflation report, the Bank stuck by previous forecasts for low growth and falling inflation but predicted a less severe risk of recession in the first of half of this year.

But Sir Mervyn warned the economy faced "choppy waters" despite recent industry surveys painting a brighter picture and added there was "no easy remedy" to the consequences of the financial crisis.

The Bank appeared to endorse market assumptions that interest rates will be held at historic lows of 0.5% until 2014, a move which will please homeowners but anger savers.

Some economists warned the report was "too optimistic", while others said the need for emergency measures - such as further quantitative easing (QE) - had faded.

In its central projection, the Bank forecast gross domestic product (GDP) of around 1% this year and 1.8% in 2013, while inflation will hit its 2% target in the final quarter of 2012 and fall to as low as 1.5% the following year.

Sir Mervyn said: "We can take some reassurance from the fact that inflation is now falling. But we are steering a course through choppy waters, and many people are experiencing difficult times."

He said growth was likely to recover gradually, although "substantial headwinds" will hamper the recovery and there is likely to be a "zig zag" pattern of alternating positive and negative growth.

Sir Mervyn said the UK's economy was moving in the right direction because it had a plan in place to tackle the country's debt and it had devalued its currency without leading to a rise in wages.

David Kern, chief economist at the British Chambers of Commerce (BCC), said: "While we agree that growth will gradually strengthen from the middle of 2012 onwards, the pace of improvement is likely to prove slower than the report predicts."

Sir Mervyn pressed the button on an additional £50 billion boost to the Bank's QE programme last week but the report left analysts divided over whether further support would be forthcoming.

Alan Clarke, economist at Scotiabank, said last week's cash injection is "likely to be the last" and added: "QE is an emergency measure and the emergency seems to have faded."

However Vicky Redwood, economist at Capital Economics, expects inflation to fall further than the Bank has predicted and the economy will require additional stimulus.

She said the committee's forecasts for growth "still look very optimistic" and added: "If growth is much weaker, as we expect, then QE is still likely to be extended further this year."

The UK economy declined by an estimated 0.2% in the fourth quarter of 2011 and would return to recession with another contraction in the current quarter.

However, the Bank said monthly output indicators for January pointed to renewed GDP growth, with output growing modestly at the beginning of this year.

"But there is uncertainty about both the extent and persistence of that pick-up," it added.

This uncertainty was highlighted by figures from the eurozone, which showed growth in the single-currency bloc declined by 0.3% in the final quarter of last year, including a 0.2% drop in the region's powerhouse economy, Germany.

The Bank warned output is likely to be volatile this year, especially given the impact of one-off factors such as the additional bank holiday granted for the Queen's Diamond Jubilee.

The report said growth is likely to remain weak before strengthening as household incomes recover, supported by low interest rates and QE.

However, the drag on spending from tight credit conditions and the Government's tough austerity measures will persist, the Bank warned.

The Bank once again raised its concerns over the threat of the eurozone debt crisis, warning that reforms required to deal with those concerns would themselves weigh on growth.

The report said a failure to undertake the reforms could lead to "disorderly" outcome which would hit UK exports and the country's financial sector.

PA

PROMOTED VIDEO
Life and Style
techCould new invention save millions in healthcare bills?
Sport
David Moyes gets soaked
sport Moyes becomes latest manager to take part in the ALS challenge
Voices
A meteor streaks across the sky during the Perseid Meteor Shower at a wind farm near Bogdanci, south of Skopje, Macedonia, in the early hours of 13 August
voicesHagel and Dempsey were pure Hollywood. They only needed Tom Cruise, says Robert Fisk
News
peopleEnglishman managed quintessential Hollywood restaurant Chasen's
Life and Style
food + drinkHarrods launches gourmet food qualification for staff
Arts and Entertainment
Michael Flatley prepares to bid farewell to the West End stage
danceMichael Flatley hits West End for last time alongside Team GB World champion Alice Upcott
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Life and Style
Horst P Horst mid-fashion shoot in New York, 1949
fashionFar-reaching retrospective to celebrate Horst P Horst's six decades of creativity
News
Members and supporters of the lesbian, gay, bisexual, transgender (LGBT) community walk with a rainbow flag during a rally in July
i100
Life and Style
Black Ivory Coffee is made using beans plucked from elephants' waste after ingested by the animals
food + drinkFirm says it has created the "rarest" coffee in the world
Arts and Entertainment
Jamie T plays live in 2007 before going on hiatus from 2010
arts + entsSinger-songwriter will perform on the Festival Republic Stage
Life and Style
food + drinkThese simple recipes will have you refreshed within minutes
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

C#.NET Server Side Developer (C#, XML, WCF, Unit Testing,SQL)

£30000 - £40000 per annum + benefits+bonus+package: Harrington Starr: C#.NET ...

Junior Database developer (SQL, T-SQL, Excel, SSRS)

£20000 - £30000 per annum + benefits+bonus+package: Harrington Starr: Junior D...

Business Analyst - Banking - London - £550 - £650

£550 - £650 per day: Orgtel: Business Analyst - Traded Credit Risk - Investmen...

Data Centre Engineer - Linux, Redhat, Solaris, SAN, Puppet

£55000 per annum: Harrington Starr: A financial software vendor at the forefro...

Day In a Page

All this talk of an ‘apocalyptic’ threat is simply childish

Robert Fisk: All this talk of an ‘apocalyptic’ threat is simply childish

Chuck Hagel and Martin Dempsey were pure Hollywood. They only needed Tom Cruise
Mafia Dons: is the Camorra in control of the Granite City?

Mafia Dons: is the Camorra in control of the Granite City?

So claims an EU report which points to the Italian Mob’s alleged grip on everything from public works to property
Emmys look set to overhaul the Oscars as Hollywood’s prize draw

Emmys look set to overhaul the Oscars as Hollywood’s prize draw

Once the poor relation, the awards show now has the top stars and boasts the best drama
What happens to African migrants once they land in Italy during the summer?

What happens to migrants once they land in Italy?

Memphis Barker follows their trail through southern Europe
French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

French connection: After 1,300 years, there’s a bridge to Mont Saint-Michel

The ugly causeway is being dismantled, an elegant connection erected in its place. So everyone’s happy, right?
Frank Mugisha: Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked

Frank Mugisha: 'Coming out was a gradual process '

Uganda's most outspoken gay rights activist on changing people's attitudes, coming out, and the threat of being attacked
Radio 1 to hire 'YouTube-famous' vloggers to broadcast online

Radio 1’s new top ten

The ‘vloggers’ signed up to find twentysomething audience
David Abraham: Big ideas for the small screen

David Abraham: Big ideas for the small screen

A blistering attack on US influence on British television has lifted the savvy head of Channel 4 out of the shadows
Florence Knight's perfect picnic: Make the most of summer's last Bank Holiday weekend

Florence Knight's perfect picnic

Polpetto's head chef shares her favourite recipes from Iced Earl Grey tea to baked peaches, mascarpone & brown sugar meringues...
Horst P Horst: The fashion photography genius who inspired Madonna comes to the V&A

Horst P Horst comes to the V&A

The London's museum has delved into its archives to stage a far-reaching retrospective celebrating the photographer's six decades of creativity
Mark Hix recipes: Try our chef's summery soups for a real seasonal refresher

Mark Hix's summery soups

Soup isn’t just about comforting broths and steaming hot bowls...
Tim Sherwood column: 'It started as a three-horse race but turned into the Grand National'

Tim Sherwood column

I would have taken the Crystal Palace job if I’d been offered it soon after my interview... but the whole process dragged on so I had to pull out
Eden Hazard: Young, gifted... not yet perfect

Eden Hazard: Young, gifted... not yet perfect

Eden Hazard admits he is still below the level of Ronaldo and Messi but, after a breakthrough season, is ready to thrill Chelsea’s fans
Tim Howard: I’m an old dog. I don’t get too excited

Tim Howard: I’m an old dog. I don’t get too excited

The Everton and US goalkeeper was such a star at the World Cup that the President phoned to congratulate him... not that he knows what the fuss is all about
Match of the Day at 50: Show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition

Tom Peck on Match of the Day at 50

The show reminds us that even the most revered BBC institution may have a finite lifespan – thanks to the opposition