Bank cuts UK growth forecast to about zero

8 August 2012 | By Gary Jackson

The Bank of England has slashed the UK’s growth forecast for 2012 after warning that the eurozone recession is damaging the country’s exports.

In its latest quarterly Inflation Report, the Bank says it now expects economic growth to essentially be flat this year – down from the 0.8 per cent expansion it forecast in May.

The bank also expects inflation to continue to fall to “around or a little below” the official target rate of 2 per cent over the medium term. Figures from the Office for National Statistics show CPI inflation is currently running at 2.4 per cent.

Bank of England governor Mervyn King points out that output in the UK has been “broadly flat over the past two year” although the country’s labour market has been “surprisingly resilient”.

The combination of stale growth and relatively healthy employment has led to “unusually low” productivity growth, which King claims is difficult to explain, and contributed to the Bank’s decision to lower its forecast.

Citing factors holding back the country’s growth, King highlights the eurozone crisis’ impact on the UK’s export market, the Government’s ongoing fiscal consolidation programme and an environment of slowing global growth.

Commentators argue that the latest Inflation Report strengthens the case for the Bank to further ease monetary policy, especially when taken alongside other recent economic indicators.

The Bank’s quantitative easing programme currently stands at £375bn, after a £50bn boost was announced in July, while the base rate has sat a historic low of 0.5 per cent for more than three years. The QE extension is scheduled to run until November.

Capital Economics chief UK economist Vicky Redwood says: “The Bank of England’s latest Inflation Report contains a substantial downward revision to the growth and inflation forecasts and supports our view that more policy stimulus is likely once the current asset purchases are completed in November.”

IHS Global Insight chief UK and European economist Howard Archer argues that recent British Retail Consortium sales data adds to the case for more easing. The BRC’s Retail Sales Monitor shows sales growth slowed during July, weakening hopes that the economy will benefit from a strong rebound in the third quarter.

Meanwhile, yesterday’s ONS industrial production figures suggest the UK’s manufacturing sector continues to feel the effects of weakening export demand, despite the overall rate of decline being smaller than feared.

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