Bank warns UK will be stuck in slow lane till 2014

THE Bank of England's gloomy forecasts for the UK economy are still too "optimistic", experts have warned.

Bank governor Sir Mervyn King yesterday said the economy would not grow as rapidly as previously expected - pointing to serious threats from the debt storms battering the eurozone.

In the Bank's quarterly inflation report, Sir Mervyn predicted GDP would grow by only 1.4 per cent this year - down from the 1.8 per cent previously forecast.

This is the second time the Bank has downgraded the UK's growth forecasts this year, having previously expected an increase of about 2 per cent.

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

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

"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."

He said the UK's growth would probably remain "sluggish" over the coming years but that it would gradually grow to stronger than normal by 2014.

He went on: "2008 was not the end of the crisis; it was one stage of the crisis, and we are going through another stage now before, I hope, we come to an end of it."

But many economists believe the economy's growth rate for 2011 could fall back even further - increasing fears of a double-dip recession.

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They said if the report had been written after last week's eurozone crisis, rather than before, Sir Mervyn's predictions would have been "even weaker".

They called on the Bank to consider a second round of quantitative easing - pumping money into the economy directly by buying bonds from commercial institutions - and for interest rates to be kept low.

Economists at Royal Bank of Scotland estimate there is now a 40 per cent chance of more quantitative easing next year.

Sir Mervyn hinted that he believed further asset purchases could still prove effective in a crisis. "We are not out of tools," he insisted.

Howard Archer, chief UK economist for IHS Global Insight, said: "While it kept its cards close to its chest on the matter, the Bank of England clearly has the door open to re-engaging in quantitative easing if the current financial turmoil continues and the economy's struggles continue."

The European Central Bank was this week forced to step in to buy up Italian and Spanish bonds in a bid to stabilise prices and cut the interest rates those key eurozone countries are paying for their debt. Just days earlier, US politicians finalised a "debt ceiling" to place a legal limit on the total amount of debt the US government can run up in order to pay its bills.

"Our hope is that we will weather this storm and emerge stronger in 2012," said Liz Cameron, chief executive of the Scottish Chambers of Commerce.

"If we are to do so, it is important that the Bank of England maintains a strong policy to guard against downside risks, keeping base rates low well into 2012 and giving serious consideration to a further extension of quantitative easing sooner rather than later."Sir Mervyn refused to say how long the UK would hold interest rates at their current low level, insisting the economy was too unpredictable to make such a statement, although economists are expecting them to remain at 0.5 per cent - the lowest in the Bank's 315-year history - for the foreseeable future.

The US Federal Reserve has pledged to keep US rates on hold for the next two years.

Sir Mervyn warned inflation could hit 5 per cent in the coming months, piling further pressure on cash-strapped consumers.

A continued squeeze on consumer spending has hit the UK economy hard, as wages fail to keep pace with the rocketing cost of living. Rising petrol prices, utility bills and the cost of food have all forced shoppers to tighten their belts.

Nida Ali, economic adviser to the Ernst & Young Item Club, said a downward revision to the short-term growth forecast had been "practically a foregone conclusion".

She added: "But we must consider that this report would have been finalised prior to the worst of the recent financial market turmoil. If this was published a week later, we could be looking at even weaker forecasts."