Bank issues ‘grim’ growth warning

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Economic growth will remain below pre-financial crisis levels for at least the next three years, Bank of England governor Sir Mervyn King has warned.

Taking the shine off a recent return to growth between July and September, Sir Mervyn said output could shrink again in the final three months of the year.

The governor braced households for an “unappealing combination” of sluggish growth and above-target inflation as he presented the Bank’s latest gloomy quarterly inflation report.

The economy grew 1 per cent in the third quarter, bringing the longest double-dip recession since the 1950s to a close, but experts warned the underlying picture was bleak.

Sir Mervyn said the figures gave an “overly optimistic impression” and were not “a reliable guide to the future”.

He said: “Continuing the recent zig-zag pattern, output growth is likely to fall back sharply in the fourth quarter as the boost from the Olympics in the summer is reversed – indeed, output may shrink a little this quarter.”

The bank downgraded its growth forecast for next year to around 1 per cent and warned that output will remain below its historical average until mid-2015.

It also revised its inflation forecast, with the rate expected to fall towards the 2 per cent target in the second half of next year, later than previously thought.

The report said: “The economy is likely to see a sustained, but slow, recovery over the next three years.”

It ruled out a rapid pick-up in growth, adding: “GDP growth is more likely to be below than above its historical average rate over the entire forecast period.

“Output is more likely than not to remain below its pre-crisis level until towards the end of the forecast period.”

The bank said the outlook for UK growth stayed uncertain, with the problems in the eurozone a major threat to the recovery.

The pace of the recovery will also depend on the extent to which recent reductions in bank industry funding costs spur an increase in lending, the Bank said.

David Kern, chief economist at the British Chambers of Commerce (BCC), said the bank’s report paints a “grim but realistic” outlook for the economy.

“The Government should accept that the private sector must be the main driver of any sustainable recovery and therefore should adopt the necessary growth policies that will make such future growth possible,” he said.

The latest report comes a few weeks after a hard-hitting review of the bank’s forecasting record was published, which recommended overhauling its methods.

David Stockton, former chief economist at the US Federal Reserve, said the bank’s monetary policy committee (MPC) had “persistently over-predicted growth since the onset of the financial crisis”.

Looking further ahead, the bank was more upbeat. Its report said: “Further out, growth is likely to pick up gently as some of the headwinds abate. In particular, households’ purchasing power should begin to strengthen if there is some revival in productivity growth.”

The bank’s near-term outlook for inflation is slightly higher than in its previous projection, reflecting increases in household energy prices.

The consumer prices index (CPI) rate of inflation rose to 2.7 per cent in October, partly as a result of higher tuition fees, but also due to higher food prices.

However, the bank still sees inflation pulling back in the second half of 2013 and falling towards the 2 per cent target in 2014.

Despite the weak growth outlook, the bank decided against injecting more emergency cash into the economy through its quantitative easing programme earlier this month.