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."

Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreEXCLUSIVE The Shakespeare play that proved too much for more than 100 people
News
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
people
News
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
Arts and Entertainment
booksThe best children's books for this summer
PROMOTED VIDEO
Sport
Colombia's James Rodriguez celebrates one of his goals during the FIFA World Cup 2014 round of 16 match between Colombia and Uruguay at the Estadio do Maracana in Rio de Janeiro, Brazil
sportColombian World Cup star completes £63m move to Spain
News
news
News
i100
News
people
Sport
Antoine Griezmann has started two of France’s four games so far
sport
Life and Style
techYahoo Japan launches service to delete your files and email your relatives when you die
Life and Style
Child's play: letting young people roam outdoors directly contradicts the current climate
lifeHow much independence should children have?
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
Tycoons' text: Warren Buffett and Bill Gates both cite John Brookes' 'Business Adventures' as their favourite book
booksFind out why America's richest men are reading John Brookes
News
i100
Arts and Entertainment
<p><strong>2008</strong></p>
<p>Troubled actor Robert Downey Jr cements his comeback from drug problems by bagging the lead role in Iron Man. Two further films follow</p>
filmRobert Downey Jr named Hollywood's highest paid actor for second year running
Life and Style
Dale Bolinger arranged to meet the girl via a fetish website
life
Property
Sign here, please: Magna Carta Island
propertyYours for a cool £4m
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

Programme Director - Conduct Risk - London

£850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

Business Analyst (Agile, SDLC, software)

£45000 - £50000 Per Annum + excellent benefits: Clearwater People Solutions Lt...

Finance Manager - Bank - Leeds - £300/day

£250 - £300 per day + competitive: Orgtel: Finance Manager - Accountant - Bank...

Compliance Officer - CF10, CF11, Compliance Oversight, AML, FX

£100000 - £120000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fi...

Day In a Page

Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

The 'scroungers’ fight back

The welfare claimants battling to alter stereotypes
Amazing video shows Nasa 'flame extinguishment experiment' in action

Fireballs in space

Amazing video shows Nasa's 'flame extinguishment experiment' in action
A Bible for billionaires

A Bible for billionaires

Find out why America's richest men are reading John Brookes
Paranoid parenting is on the rise - and our children are suffering because of it

Paranoid parenting is on the rise

And our children are suffering because of it
For sale: Island where the Magna Carta was sealed

Magna Carta Island goes on sale

Yours for a cool £4m
Phone hacking scandal special report: The slide into crime at the 'News of the World'

The hacker's tale: the slide into crime at the 'News of the World'

Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
We flinch, but there are degrees of paedophilia

We flinch, but there are degrees of paedophilia

Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
The truth about conspiracy theories is that some require considering

The truth about conspiracy theories is that some require considering

For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn
Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

Meet the man who doesn't want to go down in history as the country's last Scottish Secretary
Legoland Windsor's master model-makers reveal the tricks of their trade (including how to stop the kids wrecking your Eiffel Tower)

Meet the people who play with Lego for a living

They are the master builders: Lego's crack team of model-makers, who have just glued down the last of 650,000 bricks as they recreate Paris in Windsor. Susie Mesure goes behind the scenes
The 20 best days out for the summer holidays: From Spitfires to summer ferry sailings

20 best days out for the summer holidays

From summer ferry sailings in Tyne and Wear and adventure days at Bear Grylls Survival Academy to Spitfires at the Imperial War Museum Duxford and bog-snorkelling at the World Alternative Games...
Open-air theatres: If all the world is a stage, then everyone gets in on the act

All the wood’s a stage

Open-air productions are the cue for better box-office receipts, new audiences, more interesting artistic challenges – and a picnic
Rand Paul is a Republican with an eye on the world

Rupert Cornwell: A Republican with an eye on the world

Rand Paul is laying out his presidential stall by taking on his party's disastrous record on foreign policy
Self-preservation society: Pickles are moving from the side of your plate to become the star dish

Self-preservation society

Pickles are moving from the side of your plate to become the star dish
Generation gap opens a career sinkhole

Britons live ever longer, but still society persists in glorifying youth

We are living longer but considered 'past it' younger, the reshuffle suggests. There may be trouble ahead, says DJ Taylor