BRITAIN will have to get used to years of “persistently low growth” as it is forced to reduce its reliance on debt and cope with the fallout from the eurozone, the Governor of the Bank of England has warned.
• UK growth forecast for 2013 downgraded to 1%
• Inflation to fall, but not until second half of 2013
• Bank of England warns economy may shrink again
Publishing the bank’s quarterly inflation report yesterday, Sir Mervyn King said that Britain and other deficit countries could not avoid a lengthy spell in the economic doldrums as they come face to face with new realities.
In a stark warning, Sir Mervyn said the growth pattern would continue to “zig-zag”, with the economy in danger of shrinking later this year following the post-Olympic bounce, but unable to muster the strength to get back to its pre-crash peak in the short-term.
The news came as latest figures showed unemployment continued to rise in Scotland, but fall across the rest of the UK.
The bank’s report revised down growth for next year to just 1 per cent, and said inflation would stay above the government’s target of 2 per cent until the second half of the year, longer than previously thought.
For households, Sir Mervyn warned that a continued squeeze would be felt on incomes, with inflation likely to cancel out any real terms pay increases people may receive.
Yet, he warned, governments of indebted nations could do little but maintain a path to reduce borrowing, to show they were on a credible financial path.
His comments came as striking workers in Spain and Portugal halted transport, businesses and schools, and clashed with police, as they protested against rising unemployment and austerity policies, causing flights from the UK to be cancelled.
In the UK, Chancellor George Osborne is expected to signal a fresh round of cuts to welfare programmes next month in the pre-Budget report as ministers seek further to shrink the size of the country’s borrowing.
Both Labour and the SNP yesterday repeated their attacks over the cutbacks, but Sir Mervyn told a press conference that the UK could not “simply ignore” the need to “reduce the scale of borrowing”.
The only question facing the country, he said, was “how long will people protract the agony” by putting off decisions to cut back on debt, and to “rebalance” the global economy.
He said: “The entire world is going to have to change its pattern of growth and that is proving very difficult to bring about,” he warned. The task was being made far harder, he said, by the global situation, particularly in Europe. He said: “We face a difficult challenge in our biggest export market. The euro area plus the countries around it account for one half of our trade. The prospects there look pretty bleak. This is a very difficult environment in which the UK economy is trying to rebalance.”
The consequence, he added, was a gloomy medium-term economic future for the UK.
He concluded: “We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while.”
The bank also published new estimates for growth from a range of external forecasters. Their average figures put GDP growth at 1.2 per cent next year, 1.9 per cent in 2014 and 2 per cent in 2015.