Bank of England warns of economic storm heading from Europe

MERVYN King, governor of the Bank of England, warned today of the “risk of a storm heading our way from the Continent” as he flagged the eurozone as the greatest threat to the UK’s recovery.

Sir Mervyn’s stark assessment came as the Bank said the UK economy will not return to pre-financial crisis levels before 2014 after it cut its growth forecasts for the next two years. The Bank now expects growth of around 0.8% this year.

He also warned that the squeeze on consumer spending is set to maintain its grip as the rate of inflation falls more slowly than previously expected, remaining above the Government’s 2% target for the next year or so.

He pointed out the difficulty of factoring in an extreme financial event - such as the fall of the euro - but stressed the biggest problem for Britain’s economic recovery could come from the single currency bloc, the UK’s main trading partner.