Bank of England governor warns of 'choppy recovery' for economy

In a gloomy economic forecast, Mervyn King said the rate of growth would be lower than previously expected through 2011 as the country feels the full impact of Chancellor George Osborne's emergency Budget, with tax rises and reduced public spending coming into full effect from April.

The Bank now estimates UK growth next year at around 2.5 per cent, compared with 3.4 per cent in its May report.

Mr King said inflation was likely to remain above the bank's two per cent target throughout next year, fuelled by the forthcoming 2.5 per cent rise in VAT and by an expected rise in gas and electricity prices which is expected to pile on the misery for households this winter.

Energy firms have not disclosed their price strategies for next year but the Bank said it assumed gas prices would rise by five per cent or more in the first half of 2011.

There was better news on the jobs front as new figures showed the largest rise in employment for more than 21 years, helping reduce UK unemployment by 49,000 to 2.46 million in the three months to June.

But experts said much of the rise had been driven by more workers going part-time after struggling to find full-time positions.

Hopes that the weaker pound could lead to an export-driven recovery have also been tempered, Mr King warning of "great uncertainty" over the outlook for both the USA and the eurozone – Britain's biggest trading partner.

Recent surveys showed a sharp slowdown in high street sales, falling house prices and consumer confidence at its lowest for more than a year.

But Mr King played down fears public spending cuts would stall the recovery altogether, stating the new coalition Government's moves to tackle the UK's dire public finances had reduced the risk of interest rate rises.

"The UK recovery is likely to continue, but the overall outlook is weaker than that presented in the May report, reflecting the softening in confidence, the persistence of tight credit conditions and the faster fiscal consolidation," Mr King said.

Employment figures offered a mixed picture as the number of part-time workers surged but the number of people claiming Jobseekers Allowance fell by a far lower than expected 3,800 to 1.46 million in July.