Bank cuts growth forecast close to zero

 

Sir Mervyn King: "Economy faces headwinds and a black cloud of uncertainty hangs over investment"

The Bank of England has cut its growth forecast to close to zero from about 0.8% predicted in May, as the double-dip recession intensifies.

The quarterly inflation report indicated no growth for 2012, compared with 2% predicted a year ago.

The data had fuelled anticipation for an interest rate cut, but Governor Sir Mervyn King dismissed calls for a reduction in the near term.

He said recovery hopes had consistently been dashed.

"The big picture is that output's been flat for two years, and has continually disappointed expectations of a recovery," he told a news conference.

"We are navigating rough waters and storm clouds continue to roll in from the euro area," he added.

"Unlike the Olympians who have thrilled us over the past fortnight, our economy has not yet reached full fitness."

He said that the future was unpredictable, since no-one could predict what would happen in the eurozone crisis, which would have an impact on the UK.

Start Quote

There was no getting away from the gloomy news in the Bank's latest quarterly report”

End Quote

"It's a saga that goes on, and on, and on. [The idea] that we have come to the end of it is unrealistic. There's still a long way to go," he said.

Regarding interest rates, which currently are at an all-time low of 0.5%, he said: "Another quarter point [cut] on bank rate is not going to be the difference between having a recovery and not having a recovery."

A rate cut would damage some financial institutions, such as building societies, and therefore would be "more counter-productive than beneficial".

'Grow the economy now'

Chancellor George Osborne said that economic growth was "disappointing", but that the government had an opportunity to "give its 110% attention and effort and energy" to getting it moving.

George Osborne: "The economy is healing"

However, Labour's shadow chief secretary to the Treasury, Rachel Reeve, said the government's policies were doing long-term damage to the economy, adding: "It is clear that we cannot go on with the same failing plan from this government."

John Longworth, the director general of the British Chambers of Commerce, which represents small and medium-sized businesses around the country, said the government could be doing more to promote economic growth.

"Businesses are feeling confident in their own abilities, but worried about the general economy and the eurozone crisis," he said.

"So one of the key things the government and the Bank of England need to do is to actually build business confidence so those businesses that have cash can start to invest and grow the economy now," he added.

The Bank has struggled to explain the discrepancy between Britain's weak output and a recent improvement in the labour market, which suggests that productivity growth is "unusually low".

"That continues a recent pattern of both weak output and productivity growth that is difficult to explain," said Sir Mervyn, adding that that was a factor behind the Bank's downgrade.

Action predicted

Rachel Reeve: "Policy decisions have put downward pressure on the economy"

The pound jumped in value to 1.27 euros on the money markets following Sir Mervyn's comments.

However, analysts said the Bank would be forced to act to shore up growth in coming months, once the effects of its stimulus measures on the economy had worn off.

Sir Mervyn's comments "clearly point in the direction of further accommodation in the coming months", said Annalisa Piazza of Newedge Strategy.

"The current inflation profile doesn't show the need of an urgent move, but in our view, the BoE will be ready to act in November, when the ongoing asset purchases programme will terminate and the effects of further credit easing might be clearer," she added.

Vicky Redwood, chief UK economist of Capital Economics, agreed.

"The door is clearly open to more stimulus and we still expect both more quantitative easing and a further interest rate cut in November," she said.

The UK recession deepened between April and June, with output falling by 0.7%, official data released at the end of July showed.

The Office for National Statistics said the bigger-than-expected contraction, which followed a 0.3% drop in the first three months of the year, was largely due to a sharp slowdown in the construction sector.

Funding for Lending

The Monetary Policy Committee has continued its programme of quantitative easing (QE) in which it pumps fresh money into the banking system to try to boost lending and thus the wider economy.

Analysis

You may not be able to feel it, but the Bank thinks the economy is coming out of recession right now.

Its report firmly forecasts a rebound in economic growth in the third quarter of this year.

And it reckons this will be followed by modest economic growth thereafter.

The Olympics has something to do with it.

It is far more than a nebulous feel-good effect. And it is not even to do with tourists spending money.

The Bank's chief economist, Spencer Dale, explained that the big economic effect will come from the official statistics registering all that spending on Olympic tickets, and the sale of TV rights.

The Olympics could not have come at a better time.

In July, it injected a further £50bn into the system, taking the total value of the Bank's QE programme up to £375bn.

The Bank and the Treasury have also launched a new scheme to increase lending to households and companies.

Under the Funding for Lending initiative, the Bank of England is initially expected to lend about £80bn at below-market rates to banks and building societies.

The initiative aims to reduce the pressure from rising bank funding costs which have fed through into higher rates for domestic borrowers.

"Although its overall impact is uncertain, the early indications are positive, with some banks cutting their loan rates. By the time of our next [inflation] report in November, I hope it will be possible to say more about the initial effects of the scheme," said Sir Mervyn.

Meanwhile, eurozone speculation is currently focused on Spain, which has already secured a 100bn-euro rescue deal for its banks.

It is feared that if Spain's government is cut off by the markets and has to seek a full-blown bailout, Italy may follow close behind, which would exhaust the eurozone's current bailout capacity.

That would have far-reaching consequences for Britain, which is the euro area's biggest trading partner.

 

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  • rate this
    +1

    Comment number 450.

    No worries. The price of gold is high, let's sell off some of our reserves.

    Oh! Darn it! I forgot. Silly me.

    Gordon Brown sold it off at the lowest price possible and then stole from our pension funds.

    His predecessor sent us to war over imagined WMDs.

    And there are those out there who want Labour back in power?

    Ask not what your country can do for you but what you can do for your country.

  • Comment number 449.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    +2

    Comment number 448.

    Just goes to show how much confidence Mr King has, in the recent business lending arrangements announced by Osbourne. Nothing will change until someone really gets to grips with the filthy corrupt banking system and economic mess they have created and the obscene corporate greed culture we live in. People in very high places need finding and publicly holding to account, now, before we implode.

  • rate this
    +2

    Comment number 447.

    IT'S NOT WORKING. TRY SOMETHING ELSE.

  • rate this
    +7

    Comment number 446.

    Why ignore the real problems, for example...

    Over the last decade High Profit chains on the High Streets have used the benefits system indirectly to build their empires and kill local economies, adult workers having to claim benefits to afford to work.

    There's approx 10 million workers in this position, that's partly why we are in a mess.

  • rate this
    +4

    Comment number 445.

    and in reply to flashman camrons "we need to roll or sleeves up " comment...... i have had my sleeves rolled up all my working life its just that my arms arnt not much use when their tied behind your back....and i doubt you have ever even undone your cufflinks.

  • rate this
    -2

    Comment number 444.

    Three pieces of advice for Mr. Osbourne:

    1. Cut taxes
    2. Cut taxes again
    3. Cut more taxes

    What incentive is there for individuals to start or expand commercial businesses - the only way in which the economy can grow - if a huge proportion of their income from such activity is appropriated by government commissars? Flat tax, lower tax, fairer tax.

  • rate this
    -19

    Comment number 443.

    It astonishes me that some people on the UK have a) such short memories, b) are not intelligent enough to realise the impact on our econmy of the Eurozone. This coalition whether you hate them or love them are trying to do the right thing for Britain. Lets get behind them rather than this constant maoning and negativity

  • rate this
    +1

    Comment number 442.

    All Savers your money is being given away to bankers, venture capitalists, cheapest mortgages, un-necessary govt spending projects and un-necessary jobs that are there just to circulate money.All hard working and tax paying people, young immigrants, international students,weak leadership nations are footing the cost of these Economic Tricks.Lets get back to real economics of hard work,thrift etc

  • rate this
    +1

    Comment number 441.

    @414 zzgrark agree with you fully, that's surely the point to "Counter Cyclical" that so many of the whitehall bunch have failed to realise. It just became "Spending" instead...
    Idk about turning, I imagine the old boy would be spinning!

  • rate this
    -23

    Comment number 440.

    383.jonny 5

    direct action now!

    Here Here. Scrap Benefit payments Ration Cards only.
    Confiscate all Union subsidies or introduce a tax to the equal amount if they can afford subs they can afford more tax.
    Immediate confiscation of any money in Sodalists or Labour Voters Bank accounts above 26 k ( Benefit Max )
    A 5 year amnesty on income tax.

  • rate this
    -7

    Comment number 439.

    Economic growth wont return until the state stops spending half of our GDP.

  • rate this
    +1

    Comment number 438.

    You can't blame the rich for everything. Capitalism demands rich people or it wouldnt work. And without the drive for wealth people wouldn't start new business'. China may be rich but look at the state of living of those at the bottom and compare it to the UK. We're far better off. You could even compare the poor now to the poor a century ago, the gap is much smaller in terms of standard of living

  • rate this
    +1

    Comment number 437.

    Mervyn should have been a sailor or a weather forecaster:

    "Economy faces headwinds and a black cloud of uncertainty hangs over investment"

    "We are navigating rough waters and storm clouds continue to roll in from the euro area,"

    "UK would not be unscathed by the eurozone storm"

  • rate this
    +4

    Comment number 436.

    418.steve
    Just about everyone could have predicted this, the economy isn't working and yet the BoE and Government are not doing anything useful to put real money in the pockets of real people
    --
    Their only plan is to re-capitalise the banks and prop up the financial system uing taxpayers money. They dont give a damn about anything else.

  • rate this
    0

    Comment number 435.

    "We are suffering the unintended consequences of the monetary policy response to 9/11."



    Let me remind you that Italy has had no real growth since 1998! [sic]

    And Germany (soon followed by France and others) started to violate EZ's deficit rules in 2003. [check]

    One can blame U$A for a lot of things, but not for the current predicament of EU (esp. EZ) which is of the SYSTEMIC nature.

  • rate this
    +4

    Comment number 434.

    Back in the early 1980's Depeche Mode must have forecasted this mess with their song "Everything counts".

    The lyrics "The grabbing hands grab all they can", "everything counts in large amounts" ring particularly true.

  • rate this
    +2

    Comment number 433.

    Stop propping up these zombie banks with our money. They are finished, along with fractional reserve banking. ALL money is created and supplied as debt! Consumers/business dont want to take on any more debt, they want to pay off all the existing. We need to wipe the slate clean and start again. As for short term measures - just QE away ALL uk held gilts in one go and cut base rate to 0.1% now

  • rate this
    +4

    Comment number 432.

    I don't think that many people have realised that the 'current financial climate' is really the economic future for this country - this is how it is now. It's what academics refer to as a paradigm shift. What we may also be witnessing is a deliberately controlled collapse of major currencies (£,US$, Euro) as the 'real powers' seek their goal of a world currency and control via the money supply.

  • rate this
    -1

    Comment number 431.

    I despair about the sheer ignorance displayed by so many contributors.

    For goodness sake read an Economics text book, and at least get yourself a basic grasp of how an Economy functions.

 

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