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
    -5

    Comment number 810.

    "Britainsnotpleased
    You forget us normal everyday tax payers are funding the rich"

    No you aren't. Unless you are in the top 30% of earners, you get more back in services and benefiits than you pay in taxes.

    The wealthy in this country subsidise the rest. maybe that's how it should be but trying to say it isn't happening shows a lack of gratitude.

  • rate this
    +1

    Comment number 809.

    The other point I have to make is we are all to blame for this mess as much as the lunatics running the county for the past 15 years.
    We all happily went along with a ponzi scheme housing boom, and now this irrational bubble is going pop (and when it goes pop we are gonna feel it) we don't like it.
    Serves us right instead of investing in real values.

  • rate this
    +2

    Comment number 808.

    Sadly, Mervyn King hasn't got a clue what the economy is doing. His presentations change like the wind and all he can do is blame it on the Euro.
    The reality is ' in my book' much more serious than the Government let on.Our banks are still in dior straights encouraging lending on property over the years
    House prices must fall to an average of 3 times average wage.
    10 million folk in neg equity

  • rate this
    +3

    Comment number 807.

    793.Dr Bob Matthews
    'Where I live, I have little choice, Tory or Libdem.'
    --
    Then maybe you should stand up and fight for another party to come to your area or even start your own.
    If you know better than do something about it!

    AND STOP FEEDING THE TROLLS!!!

  • rate this
    +4

    Comment number 806.

    725.Typical_English_No8
    32 Minutes ago
    Wonder how many people on here should be looking for jobs and contributing to the UK economy as opposed to moaning about it? 700+ comments coming between 9 - 5 on a weekday. Say's it all really.
    ------------------------------------
    No it doesnt - not everyone works mon-fri 9 til 5. What about those who are retired? Those at work on a break?

  • rate this
    +4

    Comment number 805.

    The Government have helped to create the current enviroment of zero confidence with their scare mongering to get into power in the 1st place.

    All the scare mongering that we are going to end up like Greece might become a self fullfilling prophecy.

  • Comment number 804.

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

  • rate this
    +2

    Comment number 803.

    Well they don't really have any reason to make it better do they? These aren't honourable people, don't expect them to do it for the moral reasons! We need to start thorwing useless bankers in the sea/off cliffs, maybe gladiatorial combat? Once upon a time they would all have been beheaded. Bet that'd get things rolling in more ways than 1!

  • rate this
    +3

    Comment number 802.

    782. Right on credit bubble wrong on government spending. Our malaise is down to the fact that we remain unbalanced between wealth hoarded doing nothing to assist the economy and a people facing unjust cuts and a squeeze further reducing demand. We need to redistribute wealth from Rich to poor.

  • rate this
    -4

    Comment number 801.

    The economy crashed because of smoking bans introduced world wide. Pension companies needed money to pay for the extra years of life expectancy. The reality is that banks don't control the world economy, pension companies do. Although I disagree with every Tory policy, they are right to blame Labour, just not for the reasons they claim

  • rate this
    +2

    Comment number 800.

    Well, surprisingly, I fully agree with 669. If we believe in a substantive future, then surely we should invest in a cohesive long term plan for infrastructure, education, health and housing. In other words, setting out a long term plan, that governments of all political colour adhere to. It's something the Scandinavian countries easily. They have a brilliant standard of living. Everything works!

  • rate this
    +4

    Comment number 799.

    I am a public sector worker who has had their pay cut so dramatically that I am struggling to pay my bills let alone spend any money on anything other than essentials. This is just the start as the cuts get deeper.

  • rate this
    +2

    Comment number 798.

    Thank God we have the Euro Zone to blame. God knows it has nothing to do with Osborne who would not listen to so many in the world telling him to take it slower. Thank God he had Cameron and Clegg who are loaded.

  • rate this
    +2

    Comment number 797.

    Definition of QE/Insanity: doing the same thing over and over again and expecting different results.

  • rate this
    +3

    Comment number 796.

    The Boy George is a liability - he'is not of the calibre required..
    Let him replace the useless clown of a Culture Secretary - even Gideon would stand a chance of managing that job..

  • rate this
    +1

    Comment number 795.

    @780. Reason to be very optimistic. Not about a return to the pseudo economy which has been completely found out, that is for sure.I am optimistic that we can watch from the sidelines without being attacked by desperate citizens as the London miracle falls apart with much bleating and gnashing of teeth.

  • rate this
    0

    Comment number 794.

    The previous government built the unstable foundations of the boom using the housing market. Over-inflated money caused by socialist policies manifested itself into rising property prices and cheep mortgages.

    These foundations have been cracking for 5 years, economic growth will only occur after a right down of the property market which is likely to happen gradually over many more years.

  • rate this
    +5

    Comment number 793.

    719.
    Rosetta

    I did read all the party manifestos. So I then made up my mind accordingly. Having experienced recession, high unemployment and 17 % bank rates more than once under the Tories, I dismissed them because of their appalling track record. Where I live, I have little choice, Tory or Libdem. What I didn’t realise was that I was voting for the Tories!

  • rate this
    -4

    Comment number 792.

    The problem we have with expanding our manufacturing and infrastructure is that sooner or later some NIMBY or Green Zealot will thwart the plan by making us think of the poor polar bears etc. Any manufacturing also needs to be competitive, and this can't be done while we are being taxed to the hilt to fund vanity green projects or keep people on the dole.

  • rate this
    +2

    Comment number 791.

    It's pointless to talk about manufacturing our way out of this either.People's behaviour has been fundamentally changed,right across the globe.No-one (among Joe Average) is prepared to spend money as they did.And this behaviour will stay with us for a generation.Look at Japan.These economic conditions are here for a long long time.

 

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