UK economy: Dire economy forces Sir Mervyn King to rethink plans

By PETER RANSCOMBE
Published on 05/08/2012 00:00

BANK of England governor Sir Mervyn King will slash his growth forecasts for the economy yet again this week and throw open the door for further stimulus in an effort to boost the UK’s flagging output.

King is expected to use Wednesday’s quarterly inflation report to predict the UK’s economic output will flatline this year or could even contract slightly if the Eurozone crisis is not resolved.

Economists predict that the Bank will launch attempts to further stimulate the economy as early as next month after European Central Bank (ECB) president Mario Draghi’s ­“bazooka fired a dud” last week and failed to calm the ­financial markets’ nerves over the continent’s troubles.

The Bank could cut interest rates from their already record low of 0.5 per cent or embark on further quantitative easing (QE), buying government bonds from high street banks in the hope they will lend the extra cash on to struggling businesses and households.

May’s inflation report had predicted that the UK’s gross domestic product (GDP) would increase by 0.2 per cent during the three months to 30 June.

But official figures published last month showed the economy shrank by 0.7 per cent in the second quarter, dashing hopes that Britain would have lifted itself out of its double-dip recession. The data made a mockery of the Bank’s expectations for 0.7 per cent growth this year, with many economists even back in May accusing King of being “too optimistic” in his economic forecasts.

Chris Williamson, chief economist at Markit, warned: “The Bank’s report is likely to show a downgrading of its current growth forecasts, given the flow of disappointing data since the May edition. A lower forecast increases the likelihood of the Bank increasing its asset purchase programme in September, with growing numbers of analysts also expecting the Bank to further cut its policy rate, already at an all-time low of 0.5 per cent.”

Howard Archer, chief UK and European economist at IHS Global Insight, added: “The Bank’s inflation report is likely to make for grim reading and leave the door very much open for further stimulative action by the bank.

“The only crumb of comfort for the Bank of England is that at least it can revise down its consumer price inflation projections as well as its GDP growth forecasts.

“In recent times, the Bank of England has consistently had the double whammy of having to revise down its growth forecasts and revise up its consumer price inflation projections.”

Archer thinks the Bank will wait until November before pumping a further £50 billion of QE into the economy, taking its total to £425bn. The £50bn unveiled by the Bank last month for gilt buying will be used up by November.

Citi economist Michael Saunders expects the QE programme will expand to £500bn over the next year.

Britain’s economic performance is tied closely to the ECB’s ability to solve the Eurozone crisis.

Draghi promised last month to do “whatever it takes” to save the euro but markets were disappointed ­after he failed to outline a ­concrete plan of action.

Jeremy Batstone-Carr, chief economist at Charles Stanley, said: “The financial markets got what they always get – no tangible action and an intangible promise of jam tomorrow. Instead of grasping the nettle we have a promise to take unspecified action over a yet to be determined time frame using yet to be invented programmes and in an undefined way.”