UK braced for rising unemployment, resurgent inflation and recession

There was more grim news yesterday about Britain's economic prospects, with a warnings of resurgent inflation, rising unemployment and possible recession.

Mervyn King, the governor of the Bank of England, declared that the past "nice decade" of low interest rates, low inflation and steadily rising living standards was over. He said Britain now faced a "bumpy ride" of negligible growth in incomes, persistent inflation and stagnation – a return, in other words, to the sort of "stagflation" last seen in the 1970s.

The Bank's "central projection" is for growth of about 1.5 per cent next year, half the Treasury's current prediction, but Mr King conceded that "we might get the odd quarter or two of negative growth". If the economy does turn out to be as sluggish as that, then the Government's "golden rules" on public finances, already jeopardised by Tuesday's mini-Budget injection of £2.7bn into the economy, will be breached irretrievably. Mr King warned of another two years of "squeeze", with pay rises barely able to keep up with the rising cost of living.

Mr King was presenting the Bank's quarterly Inflation Report, which forecast that inflation would stay stubbornly above 3 per cent for the rest of this year and will miss the Government's 2 per cent target until 2011. The Bank sees price rises peaking at almost 4 per cent this autumn, with an outside chance that it might be closer to 5 per cent. Mr King said inflation would probably stay above the 3 per cent level that it hit last month over "several" quarters. The governor is required to publish an explanation when inflation strays more than one point from the official target and he predicted that he would "be required to write a number of open letters to the Chancellor over the next year".

Renewed concerns about inflation mean that an interest rate cut that had been widely expected for 5 June will almost certainly be postponed. But Mr King said the credit crunch was showing signs of easing, which will be good news for the beleaguered housing market. He added that repossession orders had risen more sharply than actual repossessions because lenders were simply looking to encourage repayment or negotiation.

The Bank also points to a "slowdown in future employment growth", although the sort of jump in unemployment seen in the 1970s and early 1990s is not in its "central projection". Nonetheless, the latest figures from the Office for National Statistics show the number of people claiming jobseeker's allowance was up by 7,200 in March to 806,300, the third consecutive monthly rise.

There were 22 million people in full-time jobs, up by 84,000 from the end of last year, and 7.5 million part-timers, a rise of 33,000. The unemployment rate was unchanged.

A tighter labour market does not seem to have made workers less willing to go on strike. There were 67,000 working days lost through industrial disputes in March, the highest since December, taking the yearly total to 982,000, three times higher than the year to March 2007. Next month's figures will be higher, as they will include the national teachers' strike and other public-sector action, as well as the Grangemouth refinery dispute.

Yesterday, the threat of the first national rail strike for 14 years moved closer when the Rail Maritime and Transport Union announced it was balloting 17,000 workers for industrial action.