Bank’s grim growth forecasts ‘too optimistic’

Bank Governor Sir Mervyn King warned that the economy was more likely to slip back into recession than it forecast just three months ago, with the eurozone crisis the “single biggest risk” to the recovery.

He lowered the bank’s growth forecasts for this year and 2012 to no more than 1 per cent, compared with previous estimates of 1.5 per cent and 2.2 per cent respectively.

But Vicky Redwood, chief UK economist at Capital Economics, told Channel 4 News: “The new forecasts suggest the economy is going to stagnate for a year or so, with an increased risk of recession. It is too optimistic. We expect zero growth next year.”

It is too optimistic. We expect zero growth next year. Vicky Redwood, Capital Economics

George Buckley, from Deutsche Bank, said the bank had cut its forecasts “exceptionally, exceptionally sharply”, adding: “These are very negative figures. I think the Bank of England is acknowledging that this is a much slower recovery and a much tougher outlook than previously thought.”

Relief to households

Sir Mervyn said he expected inflation to hit the government’s 2 per cent inflation target in the second half of next year before falling to as low as around 1.3 per cent in the first half of 2013.

Official figures released on Tuesday showed that the government’s preferred measure of inflation, the consumer prices index, fell from 5.2 to 5.0 per cent in October – well above the 2 per cent target.

Sir Mervyn’s growth warning coincides with the latest unemployment figures, which show there are now 2.62 million people out of work, a record 1.02 million of them under 25.

But he said real take-home pay should begin to rise next year. “The extraordinary squeeze on real take-home pay that we have seen in the last three years should now begin to come to an end.”

Ms Redwood said: “If inflation falls as expected, real pay should rise by 2013, which should give some relief to households.”

She warned that Sir Mervyn’s next forecasts in three months could be “very different” if the debt crisis in the eurozone was not resolved, and said the single currency was likely to fall apart. “We think eventually the eurozone will have to break up in one form or another, with Greece, Italy or Germany having enough and leaving.”

‘Long and arduous’

Sir Mervyn said the “journey to a more balanced world economy will be long and arduous”, with the British economy broadly flat until the middle of next year. He added: “We think we are in for, we hope, what will be a relatively short period of some weakness, in large part because of developments in the euro area and the rest of the world.

“There will be weakness in the economy over the next few quarters, and although no-one can know what the outcome will be thereafter, we expect the economy to pick up. We have seen slow but positive growth over the past year. We think that once the adjustment in the eurozone area gets through these difficulties, it will pick up again.”

A Treasury spokesman said: “The government is doing all it can to protect the UK economy and make sure that it remains a relative safe haven in the face of international instability and uncertainty, whilst also putting in place the longer term conditions needed for strong and sustainable growth.”