Bank of England highlights doubts over economic recovery

Governor Mervyn King already warned that a "sustained" recovery is uncertain despite the 1.1 per cent advance seen by the economy between April and June.

And the forecasts will reflect the deficit-busting squeeze from Chancellor George Osborne's emergency Budget as inflation is pushed up by next January's VAT hike to 20 per cent, but growth is dampened by the fiscal clampdown.

The Bank's May estimates suggest growth of around 1.5 per cent this year and an optimistic-looking 3.4 per cent advance during 2011. At June's Budget, the independent Office for Budget Responsibility (OBR) lowered estimates to just 1.2 per cent and 2.3 per cent for this year and next.

While the Governor does not believe the Budget made a "significant difference" to the chances of a double-dip recession, the Chancellor's deficit-tackling measures add up to a 113 billion clawback from the taxpayer by 2014/15.

A still-weak banking sector will prove another headwind to recovery, according to the Governor, who recently stressed there was a "considerable distance to travel" before interest rates move from their current 0.5 per cent record low.

The growth concerns come as the Bank's Monetary Policy Committee wrestles with Consumer Prices Index inflation proving far stickier than previously forecast.

The VAT rise due to kick in next year will keep inflation well above the Bank's 2 per cent inflation target for most of next year - although wage growth is lagging far behind, putting the squeeze on households.

Recent rises in food prices driven by a surge in wheat costs could add to the pressure on household budgets, although the pound recently gained ground against other global currencies.

Investec's David Page said: "We expect to see growth forecasts nudged down gently... officially recognising the greater fiscal tightening.

"However, inflation has proven more persistent in the short-term and the announced increase in VAT in January will likely keep CPI above target for much of 2011."