Growth down, inflation up warns King

The Bank of England's governor Mervyn King has cut his growth forecast for this year and next by 0.5%, and expects inflation to hit 5%...

by Andrew Saunders
Last Updated: 06 Nov 2012
The latest quarterly inflation report to come out of Threadneedle Street makes for pretty sombre reading. Projected GDP growth for 2011 is down from 1.8% to 1.4%, and the equivalent figure for 2012 is down from 2.5% to 2%. As if that weren’t enough, Merv also reckons that there is ‘a good chance’ that inflation will hit 5% before the end of this year, largely as a result of rises in energy bills. And although the Bank still expects inflation to fall in the medium term, the report admits that the timing and extent of that decline remains extremely uncertain.

Add this to Eurozone worries, yesterday’s disappointing manufacturing output figures, plus the highly unusual move by the Federal Reserve to effectively freeze US interest rates at their current historically low level until 2013, and the prospect of a full blown recovery looks almost as far off now as it did two years ago. Or as King put it, ‘In the United Kingdom, the squeeze in households’ real incomes is likely to continue to weigh on domestic demand, especially over the next year or so.’
He would not be drawn on the subject of plans for further stimulating the economy with another round of quantitative easing, but did point out a couple of bright points in an otherwise pretty downbeat picture. Firstly that the fall in the value of sterling has helped UK export competitiveness (in theory at least), and secondly that we possess a ‘credible medium-term fiscal plan’ - something which many other nations do not.

All the same, this amounts to an admission that the Bank has pulled all the levers marked ‘economic recovery’ that it has at its disposal, and that now it is just a case of waiting to see what difference they will make to the speed and direction of the ship. All the while hoping to avoid any icebergs which might float into our path

We’ve put our own house in order, in other words, and are now at the mercy of events largely outside our control, especially within the Eurozone. As King put it ‘There is a limit to what UK monetary policy can do when large, real adjustments are required.’

None of this is going to make George Osborne’s life any easier, as he comes under ever greater pressure to do something to boost growth. For without growth, the government’s central economic policy goal, the reduction of the deficit, will fail. The coalition is discovering what many a recession-hit administration has found out in the past: cutting public spending is one thing, stimulating private sector growth is quite another…

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