Analysis: Putting on a brave face as storm clouds gather

HE MAY have sounded downbeat and his message bleak. But compared with the mood in financial markets yesterday as shares resumed their downward spiral, Bank of England governor Sir Mervyn King is the nearest thing we have to Mr Happy.

The growth forecast is cut yet again - from 1.8 per cent to about 1.4 per cent for 2010 and to 2 per cent for next year. It is the sixth downgrade since February 2010. There was no firm pledge to echo that of US Fed chairman Ben Bernanke, that interest rates would be held down for at least two years. The Bank just doesn't do commitments of this sort.

However, his remark that tighter monetary policy would not have been "remotely sensible" could be seen as a slapdown of the Bank's chief economist Spencer Dale. There was no indication whether it might resort to more QE, though this door remains open.

Decidedly subdued though all this was, it's far from the disaster scenario now driving markets. The Bank is still forecasting growth, not recession - and a slight strengthening of the pace next year. He said inflation was still likely to hit 5 per cent this year, though there was slight softening of the language from the previous report. And the Bank expects the rate to fall back next year as temporary factors fade. The Consumer Price Index will be a "little below" the Bank's target of 2 per cent in the medium term.

However, trying to get anything more upbeat from the Bank these days would be like trying to play a juke box in a funeral home.

And it is telling that the data deadline for its latest assessment was early last week - before world stock markets began their plunge. Sir Mervyn admitted that some of the biggest risks to growth came from the eurozone, a key area for UK exporters. Prospects here are far from bright. Global imbalances are not being properly tackled and "the burden of debt is still there. The problem will take, I think, a number of years before we will find our way through it".

When he made a similar pronouncement at a private meeting with the Edinburgh Chamber of Commerce last month, the air seemed to seep out of the room. Now there is little doubt, in Scotland or in London, that we are in for a long, slow haul - and that's the least worse case.

What was disconcerting about this presentation was the warning that "the big risks facing the UK economy come from the rest of the world" and "there is a limit to what monetary policy can do". It had an eerie resonance with the words of central bankers in the 1930s - and the muffled thump of a towel being thrown in.