Here comes TRIPLE dip: Bank of England slashes growth forecasts and warns economy will 'zig-zag'

 

The Bank of England has slashed its growth forecasts and hiked its inflation expectations, as Sir Mervyn King unveiled the gloomiest set of medium-term economic projections for the UK since the central bank won independence in 1997.

The Bank’s Governor also warned that the economy, which emerged strongly from recession earlier this year, may already be contracting again, raising the prospect of a “triple dip” recession. “Output may shrink a little this quarter” he said at the Bank’s regular press conference.

The Bank’s latest Inflation Report shows that the Bank expects growth to remain well below its historic trend rate over the next three years. It now does not see the UK regaining its pre-2008 level of output until 2015. Inflation is expected by the Bank to remain above 2 per cent throughout next year and not to fall to the official target level until 2014.

The Governor said that the stark deterioration was a consequence of the ongoing eurozone crisis, which continues to make UK banks reluctant to lend, and unexpected hikes in world energy and food prices. “We have decided the chances of a rapid recovery are a good deal less than we thought” he said. The eurozone is expected to report this morning that the single currency area has returned to recession after contracting again in the third quarter of the year.

The Bank of England’s Monetary Policy Committee has purchased £375bn of government bonds to support the domestic economy. It has also established an £80bn Funding for Lending Scheme, which is designed to increase the flow of bank credit to British households and businesses.

The Bank paused its bond buying programme, known as Quantitative Easing, this month, but the Governor said that more could follow. However, he also stressed that there are “limits” to what monetary stimulus can achieve in an economy such as the UK, which is attempting to rebalance from consumption-led growth to investment-led growth. “It may be unreasonable to expect anything other than a slow and protracted recovery” he said.

The labour market has been one of the few bright spots in the UK economy in recent years, with unemployment peaking at a considerably lower rate than in past recessions. But new statistics from the Office for National Statistics yesterday suggested that even this light could be fading. The ONS reported that total employment grew by 100,000 in the third quarter of the year, a slower rate than in the previous quarter. And a monthly breakdown of the labour market figures shows that unemployment rose by 50,000 in September.

The UK economy grew by 1 per cent in the third quarter of 2012, pulling the UK out of its double dip recession. But this strong figure was flattered by one-off factors, including Olympic ticket sales and activity shifted from the previous quarter when there was an extra bank holiday. If the economy was to register a contraction in the final quarter of this year and negative output in the first three months of 2013 the UK would be back in recession for the third time since 2008.

The Governor brushed aside suggestions that the Bank’s independence had been eroded by the recent decision of the Treasury to take around £37bn in cash from the Bank’s balance sheet, a byproduct of Quantitative Easing, and use it to reduce the Government’s borrowing levels. “To be honest I think it’s a lot of fuss about nothing” the Governor said, stressing that the Treasury had committed to transfer back the funds when the Bank comes to unwind QE.

The shadow chancellor, Ed Balls, said: “This sobering report shows why David Cameron and George Osborne’s deeply complacent approach to the economy is so misplaced. Their failing policies have seen two years of almost no growth and the Bank of England is now forecasting lower growth and higher inflation than just a few months ago.”

The Bank’s growth forecast for 2013 is around 1.2 per cent, down from the 1.8 per cent it expected in August. The annual CPI inflation rate in October rose to 2.7 per cent, pushed up by the lifting of the cap on university tuition fees and higher food prices. Price rises by energy companies are expected to push the cost of living higher in the coming months.

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