Sir Mervyn King said that a recovery for the beleaguered UK economy is finally “in sight” as the Bank of England’s Governor revised up his own growth forecast for the first time since the outbreak of the global financial crisis five years ago.
Unveiling the Bank’s quarterly Inflation Report Sir Mervyn said that he expects growth in the second quarter of this year to “strengthen” to 0.5 per cent, following a 0.3 per cent expansion in the first three months. Growth over 2013 is now projected by the Bank to come in at around 1.2 per cent, up from its 1 per cent forecast in February. Sir Mervyn also said that the annual inflation rate is likely to drop to the Bank’s official target of 2 per cent within two years, having previously warned that the rate would remain above this level over the forecast period.
“There is a welcome change in the economic outlook” said Sir Mervyn, presenting his final Inflation Report before he retires at the end of June. “Today’s projections are for growth to be a little stronger and inflation a little weaker than we expected three months ago”.
George Osborne, speaking at a Confederation of British Industry dinner in London, hailed the Bank’s improved forecasts. “The most recent economic news has been more encouraging” he told his audience of industrialists. “The economy is growing. Surveys are better. Confidence is returning to financial markets”. The Chancellor said that those, including the International Monetary Fund, who have called on him to slow the pace of his fiscal consolidation in order to support the recovery would jeopardise the progress of recent months and “take us back to square one”.
There was, however, some disappointing news from the Office for National Statistics on the performance of the labour market. It reported that employment fell by 43,000 in the first quarter of 2013, while unemployment grew by 15,000. The jobless rate rose 0.1 per cent to 7.8 per cent with 2.52 million people officially out of work. Analysts said that the strong performance of the labour market last year, when surprisingly strong jobs growth was recorded, seemed to be petering out. The report also revealed that average pay, excluding bonuses, rose by just 0.8 per cent on a year earlier in that same period, well below the annual inflation rate of 2.8 per cent. This means that most workers are still experiencing real terms pay cuts.
The ONS estimated last month that Britain’s Gross Domestic Product grew by 0.3 per cent in the first three months of the year, signalling that the UK avoiding slipping into its third recession since 2008. Since the UK first entered recession in 2008 the Bank of England has been consistently forced to downgrade its growth forecasts. And the Bank’s optimism in the past over economic turning points has proved misplaced. In February 2012 Sir Mervyn said that “we are moving in the right direction” only to see the economy flat-line for the next ten months.
Sir Mervyn will hand over the Governorship at the end of June to the Canadian central banker Mark Carney.