The Bank of England has lowered its growth forecast for the UK and predicted that the economy will remain flat for the rest of this year, with slow growth after that.
Releasing its quarterly Inflation Report this morning, the Bank cut its forecast for growth in 2012 to zero, from the 0.8% predicted in May. Next year’s estimate was downgraded to 1.9% from 2.4% and in two years’ time growth is now expected to be around 2%, down from the earlier forecast of 2.67%.
The report said that the downgrading of the outlook from May reflects the possibility that factors contributing to the weakness of growth since the financial crisis may persist.
GDP growth in the second half “is more likely to be below than above its historical average rate”.
Meanwhile inflation is expected to fall further this year, easing the squeeze on households’ spending power.
Sir Mervyn King, the Governor of the Bank of England, confirmed in a press conference that the overall outlook for growth is now weaker and added that “storm clouds continue to roll in from the euro area”.
Official figures released last month showed that the UK recession deepened between April and June, with GDP declining by an estimated 0.7%. Sir Mervyn said today that the “underlying data is probably not as weak as the headline data suggests” but it will be a long, slow process to bring about a recovery and rebalancing of the economy.
Referring to Team GB’s medal success in the London Olympic Games, Sir Mervyn said that the athletes “have shown us the importance of total commitment when trying to achieve a goal that may lie some years ahead”.
Regarding interest rates, which stand at an all-time low of 0.5%, Sir Mervyn dismissed calls for a reduction by saying that a quarter point cut would not be “the difference between having a recovery and not having a recovery”. In fact, a rate cut would damage some financial institutions and could prove to be counter-productive, he said.