Sickly Britain crawls towards low growth

Bank offers 'unusually uncertain' picture of an economy in need of 'healing'

The UK faces a "relatively slow and protracted recovery", according to the Governor of the Bank of England, Mervyn King. The Bank's latest Inflation Report suggests that the British economy will contract by about 4 per cent this year, with a nadir of -4.5 per cent around the summer, before returning to growth early in 2010.

Next year is projected to see an expansion of about 1 per cent, with growth of 2.5 per cent following in 2011. These are more pessimistic forecasts than the Treasury's Budget predictions of -3.5 per cent, 1 per cent and 3.5 per cent respectively. They are also lower than the Bank's previous estimates, published in February (of -3 per cent, 2.3 per cent and 3.6 per cent).

Mr King warned that "the pace of the recovery may be slowed by a number of factors: the contraction in world demand and trade may be protracted; households may save more; and the availability of credit to companies and households may improve only gradually". He again expressed concerns about the level of bank lending, especially higher fees and other charges, and endorsed recent comments by the former chairman of the US Federal Reserve, Alan Greenspan, that the banks may still not have the capital they need to return to more normal levels of lending in today's risk-averse climate.

Even so, Mr King again repeated that the authorities had "stabilised" the banking system after the panics of the past year. Inflation, says the Bank, is likely to stay below the official 2 per cent until at least 2012 – even with the hundreds of billions of spending power now being injected into the economy. The Bank says that inflation will reach 1.5 per cent by the end of 2010.

The markets took the report as signalling a continuation of the Bank's loose monetary policy to avoid deflation or a relapse in the recovery; gilt prices firmed, inferring lower interest rates, yesterday. Sterling weakened against the euro and the dollar after Mr King's remarks. George Buckley, of Deutsche Bank, said: "These uncertainties add to our conviction that the Monetary Policy Committee will be reticent to take back policy easing quickly. To do so could threaten any continued economic improvement and potentially lead to a W-shaped (rather than V-shaped) recovery."

The expectation is that interest rates will remain at 0.5 per cent for another year, and the policy of quantitative easing completed and possibly extended even further. Jonathan Loynes, of Capital Economics, commented: "The prospect of a prolonged period of very low short rates and possible further asset purchases provides scope for a further rebound in gilts."

David Page, economist at Investec, added: "Given the uncertainties, we would not be surprised to see the BoE raise its asset purchase target again. This could include asking the Chancellor to raise the £150bn asset purchase ceiling."

However, Mr King also gave "pretty solid" reasons why the economy ought to stage a recovery. Apart from survey evidence from business organisations and the Bank's own soundings on the economy, Mr King pointed to the large fiscal and monetary stimulus now being implemented by the authorities; the near-30 per cent deprecation in sterling since its peaks in 2007; and the reversal of previous "destocking" effects – where retailers sell from stock in the face of falling sales and cancel orders from factories, something that greatly exacerbated the downturn among manufacturers in particular. Mr King said that the financial system had received "emergency treatment": "a period of healing was now required".

Throughout the report the huge countervailing forces facing the economy are stressed, leaving the outlook for economic growth "unusually uncertain". The Bank's "fan chart" to illustrate the range of outcomes it deems possible is extremely wide: a 7.5 percentage points spread compared with the 4.5 percentage points in the May 2008 Inflation Report. Mr King offered the view that "the chance that the level of output will be higher in the middle of 2010 is... no higher than the probability that output will be lower in the middle of 2010. In other words, growth has just as much chance of being positive over the next 12 months as it has of being negative".

Despite past public misgivings about the public finances, Mr King went out of his way to compliment the Chancellor, Alistair Darling: "It was helpful that the Budget was extremely honest and open about the scale of the fiscal problems facing us... There certainly seem to us at least as many reasons to suppose that it may turn out to be a smaller deficit than a bigger one." Nonetheless he was less generous on the longer term outlook: "There is no doubt that we will need to move back to a path for fiscal sustainability – that is very important."

Start your day with The Independent, sign up for daily news emails
Voices
voices
News
general electionThis quiz matches undecided voters with the best party for them
Arts and Entertainment
Keira Knightley and Matthew Macfadyen starred in the big screen adaptation of Austen's novel in 2005
tvStar says studios are forcing actors to get buff for period roles
News
Prince William and his wife Catherine, Duchess of Cambridge show their newly-born daughter, their second child, to the media outside the Lindo Wing at St Mary's Hospital in central London, on 2 May 2015.
news
ebooks
ebooksA celebration of British elections
  • Get to the point
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

Ashdown Group: Trainee Consultant - Surrey/ South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Ashdown Group: Trainee Consultant - Surrey / South West London

£22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

Recruitment Genius: Claims Administrator

£16000 - £18500 per annum: Recruitment Genius: This is an excellent opportunit...

Recruitment Genius: Senior SEO Executive

£24000 - £28000 per annum: Recruitment Genius: A Senior SEO Executive is requi...

Day In a Page

Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power
Rare and exclusive video shows the horrific price paid by activists for challenging the rule of jihadist extremists in Syria

The price to be paid for challenging the rule of extremists

A revolution now 'consuming its own children'
Welcome to the world of Megagames

Welcome to the world of Megagames

300 players take part in Watch the Skies! board game in London
'Nymphomaniac' actress reveals what it was really like to star in one of the most explicit films ever

Charlotte Gainsbourg on 'Nymphomaniac'

Starring in one of the most explicit films ever
Robert Fisk in Abu Dhabi: The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers

Robert Fisk in Abu Dhabi

The Emirates' out-of-sight migrant workers helping to build the dream projects of its rulers
Vince Cable interview: Charging fees for employment tribunals was 'a very bad move'

Vince Cable exclusive interview

Charging fees for employment tribunals was 'a very bad move'
Iwan Rheon interview: Game of Thrones star returns to his Welsh roots to record debut album

Iwan Rheon is returning to his Welsh roots

Rheon is best known for his role as the Bastard of Bolton. It's gruelling playing a sadistic torturer, he tells Craig McLean, but it hasn't stopped him recording an album of Welsh psychedelia
Morne Hardenberg interview: Cameraman for BBC's upcoming show Shark on filming the ocean's most dangerous predator

It's time for my close-up

Meet the man who films great whites for a living
Increasing numbers of homeless people in America keep their mobile phones on the streets

Homeless people keep mobile phones

A homeless person with a smartphone is a common sight in the US. And that's creating a network where the 'hobo' community can share information - and fight stigma - like never before