Bank of England slashes growth forecast to zero as UK recession deepens

EUROPE’S debt crisis, tough austerity measures at home and tight bank lending mean Britain’s economy will grind to a halt this year, according to Bank of England governor Sir Mervyn King.

• Growth forecast cut to zero

• Double-dip recession longest since 1950s

• GDP drop attributed to poor construction and manufacturing output

The Bank today slashed its economic growth forecast for 2012 to around zero from around 0.8 per cent in its May estimate.

Britain’s gross domestic product (GDP) contracted by 0.7 per cent during the second quarter, making a mockery of the Bank’s previous growth forecasts for the year as a whole.

The rate of inflation is now expected to hit the UK government’s 2 per cent target towards the end of this year, earlier than previously expected, and could slow further to around 1.5 per cent towards the end of 2013, the Bank said.

Speaking after he published his quarterly inflation report, King defended the central bank’s record on eonomic forecasting, highlighting the effect of the eurozone debt crisis and rising energy prices on previous forecasts.

The economy is now expected to grow by around 1.9 per cent in 2013, compared to 2.4 per cent in the bank’s previous estimate in May.

The downbeat outlook will increase the chances of further emergency support measures, including a possible interest rate cut below the current record low of 0.5 per cent and a further cash injection to the Bank’s quantitative easing programme.

In a boost to borrowers, the Bank signalled that it did not expect interest rates to rise above 0.5 per cent until 2015, a prediction that will dismay many pensioners and other savers.

Presenting the gloomy report, King said: “The underlying picture is that output has been at best broadly flat over the past two years, and has continually disappointed of a recovery.”

King warned that the UK was “navigating rough waters and storm clouds continue to roll in from the euro area”.

But he said the contraction in output over the past three quarters – signalling the longest double-dip recession since the 1950s – is probably not as weak as suggested.

He said the extra bank holiday in June for the diamond jubilee celebrations will have reduced output by around 0.5 percentage points and should unwind in the third quarter.

The governor also raised doubts over the accuracy of official construction figures, which are “at odds” with other survey data.

King said early indications on the £80 billion “funding for lending” scheme to unclog the flow of credit were positive, with some banks cutting their loan rates.

But he warned: “The economy will continue to face headwinds over the forecast period, from the fiscal consolidation and tight credit conditions at home, as well as from the difficulties in the euro area and a broader slowing in the world economy.”

The euro area is hitting demand for UK exports and efforts to rebalance the economy “will require patience”, King said.

“GDP growth is more likely than not to be below its historical average rate in the second half of the forecast period.

“As I have said many times, the recovery and rebalancing of our economy will be a long, slow process.”

Vicky Redwood, chief UK economist at Capital Economics, said: “The door is clearly open to more stimulus and we still expect both more QE and a further interest rate cut in November.”

Jason Conibear, sales and trading director at foreign currency exchange firm Cambridge Mercantile, added: “The Bank of England hasn’t got the foggiest how things might pan out in the economy, just that it’s likely to be a long and slow process — something we all know anyway.

“Ask a tough question and Mervyn King is quick to parry with the eurozone ‘storm clouds’ and how, in this time of unprecedented uncertainty, it’s impossible to forecast with any reliability.

“Growth-wise, the governor’s forecasts were as much use as non-stick glue. We’ll find out how the Funding for Lending scheme is performing in the next report, but the worry is that this is far too conservative a policy action.

“Isn’t it time to push the thermonuclear button? The Bank needs to do something radical and robust to get us out of this rut, not tinker around the edges.”