Wall Street stocks slide despite early rally

After disappointment with the initiatives announced by the US Federal Reserve saw the Dow Jones Industrial Average tumble more than three per cent in early dealings, the FTSE 100 in London followed suit, dropping 129 points to 5035.6.

The Fed’s promise to keep interest rates at near zero until the middle of 2013, had seen the Dow close almost 4 per cent up on Tuesday night.

But the lift in shares was reversed on Wednesday as fears over the economic recovery continued to plague the markets.

Talk of a potential credit downgrade for France added to the unease, along with a new forecast from the Bank of England confirming that UK GDP is set to grow by around 1.4 per cent in 2011 – down from its estimate of around 1.8 per cent in May.

UK growth cut

It is the second time the Bank has downgraded the UK’s growth forecasts this year, having previously expected growth of about two per cent.

Governor Sir Mervyn King said the outlook for the global economy had deteriorated as a result of the eurozone and US debt crises.

Next year’s growth will also be significantly slower than previously thought at about two per cent, down from around 2.5 per cent, the Bank said.

The outlook for growth in the world economy has deteriorated. Mervyn King

The UK’s growth is likely to be “sluggish” but will gradually grow to stronger than normal by 2014.

Economists said the latest projections show that the Bank could mirror the US and hold off raising rates until 2013, extending a run that has seen the cost of borrowing stay at its record low for 29 months.

Banking shares were particularly hard hit. Lloyds Banking Group, which has been badly affected by the recent falling share prices, shed a further 0.8p to 31.3p, while Barclays was 11.6p lower at 167.8p and Royal Bank of Scotland down 1.5p at 24.6p.

“The outlook for growth in the world economy has deteriorated and, largely as a consequence, near-term growth prospects at home are somewhat weaker,” Bank Governor Sir Mervyn King said.

“In addition, the debt crisis in the eurozone has the potential to impact significantly further on the UK economy.”

Sir Mervyn added: “There are a number of headwinds to world and domestic growth over the forecast period, not least the private and public debt overhang. And these headwinds are becoming stronger by the day.”