New man at the Bank left under no illusions over perils facing economy

UK faces slow recovery as growth forecasts slashed

Incoming Bank of England Governor Mark Carney was left under no illusions over the perils facing the British economy today as UK growth prospects were slashed again.

The Organisation for Economic Co-operation and Development  is now pencilling in a 0.1% contraction for the UK this year and growth of just 0.9% in 2013 - well below its last set of forecasts in May.

The latest gloom comes as the independent Office for Budget Responsibility prepares to make a knife-edge verdict on the state of the public finances and Chancellor George Osborne's fiscal rules.

The OECD said today that the Chancellor could be forced to abandon the second of his targets - to put debt as a share of the economy on a downward course by 2015/6 - if the economy disappoints. The thinktank, which is worried about the lingering risks from the eurozone crisis and the impact of food and energy bills, said: "In the event of lower than expected growth, the flexibility of the fiscal mandate should be utilised... even though this may imply pushing out the debt target."

Sir Mervyn King , who told MPs on the Treasury Select Committee that the Bank was "in very good hands" with the Canadian, repeated his warning over the recovery. He said: "It may be unreasonable to expect anything other than a slow and protracted recovery absent of a further fall in the real exchange rate."

There was at least better news on the economy from the Office for National Statistics, which left its growth estimates for the July to September quarter unchanged today at 1% - the best in five years - despite fears of a downgrade. Shoppers hit the high street with a vengence over the summer with a 0.6% rise in consumer spending also the strongest since 2010.

The economy enjoyed the steroid boost of an extra working day compared to the April-June quarter as well as a "positive and significant effect" on spending from the Olympics and Paralympics. Higher spending from foreign tourists - which counts as exports - helped the UK's trade position as earnings from UK visitors jumped 9% in August despite a 5% fall in visitor numbers compared to a year earlier.

But year on year the economy is 0.1% smaller, the ONS added, worse than its previous estimate. More timely indicators have also been downbeat after a 0.8% slide in October retail spending, weak business surveys and warnings from Sir Mervyn that the economy could shrink again during the current quarter.

Nida Ali, economic adviser to the Ernst & Young ITEM Club said: "These figures do little to change the broader picture of a fragile economy. The near-term outlook is pretty gloomy with monthly economic indicators pointing to negligible growth in the fourth quarter."