Bank of England slashes growth forecast to zero

Surprise, surprise, Mervyn King and chums have decided to downgrade their 2012 growth forecast from 0.8% to a piddly zero.

by Michael Northcott
Last Updated: 19 Aug 2013

Being governor of the Bank of England mostly means bearing bad news about the UK economy these days, and today is no different. Using his trademark nautical references (see below), Mervyn King explained to a press conference this morning that the economy will not grow this year. This is a massive adjustment from the 0.8% growth the Bank predicted in May, and the 2% predicted a year ago. 

Whilst it is obviously not what we wanted to hear, it is no surprise really, especially since last month’s GDP figures showed the economy had contracted by 0.8%. Nobody had been expecting such a large contraction, so it was always going to throw the forecasts off. Merv told how the economy is still in ‘rough waters’ and recycled his ‘black cloud of uncertainty’ line about the deepening eurozone crisis. And some crisis it is. Today brings news that France may return to recession in Q3, Germany’s exports declined in June, and Greece has had its sovereign credit rating outlook downgraded from stable to negative by Standard & Poor’s.  

On the plus side, he did point out that the UK is very close to achieving its target 2% inflation, which brings wages and inflation much closer to being aligned and means in turn that the squeeze on household incomes is abating (albeit only slightly). Still, the governor dashed any hopes that interest rates would be reduced any further; with a brusque ‘I don’t think a change in the Bank rate is going to make much of a difference,’ he swiped the idea aside. There also seems to be some genuine confusion about UK productivity: the Bank doesn’t understand how GDP growth can be faltering when firms are actually hiring (unemployment fell again last month).

The Bank’s chief economist, Spencer Dale, also upset those who thought the Olympics would bring a boost to the UK economy. He explained that the extra tourism will make minimal impact because more British people than usual have gone on holiday to get away from the Games. He added that Olympic ticket sales and the TV rights deals for broadcasting coverage would only make a ‘small positive contribution’. So at £10bn, this has been a very expensive sports day bonanza, right in the middle of an economic mire…

Merv also kept schtum on how much effect the Funding for Lending Scheme will have, saying only that the Bank will know more in November. So SMEs, don’t hold your breath – Mervyn certainly isn’t. There are still some voices predicting that we will return to modest growth by the middle of next year, as the BoE is still in the middle of its quantitative easing programme, having injected a further £50bn into the economy in July. Better times may still be within reach: today’s forecast is only for 2012, remember…

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