Bank of England rains on recovery parade

The immediate prospects for Britain's economy are grimmer than in any previous forecast and output is unlikely to revert to pre-crisis levels before 2011, the Bank of England warned yesterday.

Presenting the Bank's quarterly Inflation Report, the Governor, Mervyn King, was at pains to stress that, while the economy might soon return to modest growth, that was not necessarily a cause for "bunting and celebration".

The fall in GDP of about 6 per cent had been severe and the "prolonged period of balance-sheet adjustment" now beginning would hold back growth, King said, adding that output was "unlikely, at least for a considerable period, to return to a level consistent with a continuation of its pre-crisis trend".

The economy, he said, had "just started on the road to recovery", and the Bank believed inflation was "on balance more likely to be below the target than above it for most of the forecast period, though by the end the risks are broadly balanced".

The report was issued as the Office for National Statistics (ONS) announced an apparent stabilisation in the jobs market, with an official 30,000 rise in unemployment figures for September, to 2.461 million. On the most recent reading of the figures, the number of people out of work has actually fallen by a few thousand since July.

Inflation is likely to rise towards 3 per cent next year as VAT returns to 17.5 per cent and higher commodity prices feed through, before price increases again subside to 1 per cent. King promised that the bank would "see through" such volatility - a sentiment welcomed by David Kern, the chief economist at the British Chambers of Commerce, who said: "It is important that legitimate worries over medium-term inflation risks do not become the trigger for an unduly early withdrawal of the quantitative easing programme. The risk of a double-dip recession remains serious."

However, the Bank did strike a more upbeat tone about longer-term growth prospects, boosted by its £200 billion ($448 billion) injection of money into the economy through quantitative easing (QE), a weaker pound and a stronger world economy. The shock 0.4 per cent drop in quarterly GDP between July and September might, said King, be revised upwards by the ONS, but the "numbers speak for themselves".

The Bank forecasts growth will hit 4 per cent year-on-year in mid-2011 before easing to about 3 per cent in 2012.

Overall, growth of about 2.1 per cent is the central forecast for 2010. King said he kept "an open mind" about extending quantitative easing, remarks that pushed the sterling lower.

Most economists took the Bank's report and the Governor's comments as "doveish". Howard Archer, of Global Insight, said: "Further QE cannot be ruled out but is unlikely unless the economy suffers a major relapse in 2010. Any policy tightening remains a long way off and interest rates are likely to stay at 0.5 per cent until at least late-2010, and very possibly beyond."

King chose to slap down the Conservative leader, David Cameron, who told his party conference that QE would "sometime soon have to stop because in the end printing money leads to inflation".

King said that it was matter for the MPC under current arrangements. He added that "the need for a credible plan to ensure a substantial reduction in the fiscal deficit is now clear to everyone".

- INDEPENDENT