The Bank of England has cut its growth outlook for the UK economy, citing shaky business and consumer confidence, tight bank lending and the government's spending cuts.
The central bank's warning that Britain faces a protracted and "choppy recovery" came as official data showed a sharp rise in long-term unemployment and a smaller than expected fall in the number of people claiming jobless benefits.
The Bank's latest quarterly inflation report this morning suggested times will remain tough for many months to come and that it is in no hurry to raise interest rates from their record low of 0.5%. But with commentators increasingly debating whether the UK is headed for a double-dip recession, many economists said the Bank was still too optimistic on growth.
The Bank's report, which forecasts economic prospects two years out, sees growth nearer 3% then, down from its previous prediction for about 3.5%. It also predicted inflation would fall to well below its 2% target in two years, helped by slack in the recovering labour market.
Presenting the report, governor Mervyn King said business and consumer surveys had weakened "quite markedly" recently, credit conditions were not easing as quickly as the Bank had expected and the government's fiscal measures would also dampen growth – although they would remove some long-term downside risks to the economy.
"Whereas crises occur suddenly, they fade only gradually," King said in his opening statement. "It will take many years before bank balance sheets and fiscal positions return to anything like normal. In the meantime they will act as headwinds to the recovery."
The pound weakened and government bond prices rallied on the report as traders raised their bets of rates staying on hold and of the Bank maybe even restarting its programme of quantitative easing – pumping electronic money into a flagging economy. Rob Carnell at ING Financial Markets said that although the Bank's growth forecast was still high, governor Mervyn King "sounded a good deal more cautious on growth than these figures suggest". ING sees growth at about half the Bank's forecast – 1.5% in 2011 and 2012.
King did indeed flag up a number of risks to the growth outlook. He echoed the government's emphasis that the UK economy needed to be rebalanced away from private and public consumption and towards net exports after the latest data this week showed imports continue to dwarf exports. But King warned that achieving that rebalancing "is likely to mean a choppy recovery".
The governor also highlighted troubles in key export markets, echoing concerns of British businesses that the US could be headed for a double-dip recession while the eurozone countries will struggle as their governments push through fiscal reforms. "There is great uncertainty about the outlook for both the United States and our most important trading partner, the euro area," said King.
But for business groups, King was not cautious enough. David Kern, chief economist at the British Chambers of Commerce, said the Bank needed to take better account of George Osborne's package of spending cuts and tax rises.
"The report's growth projections, although slightly lower than in May, are still too optimistic. They do not yet acknowledge the full impact of the deficit-reduction measures taken in the emergency budget," he said.
On price pressures, the Bank said the VAT rise announced in the budget and planned for January would keep inflation above its 2% target until the end of 2011 – significantly longer than projected in May. But then once that drops out of the equation inflation would fall back, probably to below the 2% target.
There was reassuring inflation news for the Bank in the labour market data this morning. Suggesting high headline inflation – at 3.2% – is not translating into big wage rises, average earnings were up an annual 1.3% in the three months to June – the smallest rise since January.
The fact that workers appear unable to get pay rises to match price pressures in the wider economy reflects ongoing slack in the labour market. The Office for National Statistics data showed the number of people claiming jobless benefits dropped by just 3,800 last month. That was well below forecasts for a 16,500 fall.
At the same time, less up-to-date figures on the employment level showed it enjoyed its biggest jump since 1989 in the three months to June, when the overall economy rebounded. But much of that was down to companies hiring part-time workers, suggesting they are still too nervous about the fragile recovery to hire full-time staff.
Many companies have complained that they are struggling to invest or hire new staff because credit conditions remain so tight. King conceded today that small businesses were bearing the brunt of constrained lending but he stopped short of blaming the banks.
"I'm not saying they should do more. It's an economic question," he said, citing the deep financial crisis and banks' own troubles getting funds.
You have characters left
Please read our community standards.
Closing this window without pressing "Post your comment" will result in your words being lost.
Are you sure?
Thank you for your comment. This has been submitted for moderation.
Your comment has been successfully posted.
Sorry, something has gone wrong and this action cannot be completed. Please try again later.