Bank of England says UK economy 'to zigzag' this year

The UK economy will "zigzag" this year, dipping in and out of growth, but avoid going back into recession, Bank of England chief Sir Mervyn King has said.

The Bank'squarterly inflation reportpredicts the economy will grow by about 1% and forecasts inflation will continue to fall in the coming months.

However, it now predicts inflation will decline towards 1.8% by 2014, not as low as the previous estimate of 1.3%.

Sir Mervyn also repeated that the eurozone crisis remained a big risk.

The report came on the same day official figures showed UK unemployment rose by 48,000 to 2.67 million in the three months to December, the smallest rise in almost a year.

Sir Mervyn said that some business surveys had indicated a pickup in the economy at the start of this year, but said this may not last.

"The fiscal consolidation and tight credit conditions at home and the weakness of our major overseas trading partners are acting as a drag on growth," said Sir Mervyn.

"The underlying need for repair of balance sheets means that the path of recovery is likely to be slow and uncertain. For much of this year, there is likely to be a zigzag pattern of alternating positive and negative quarterly growth rates."

He also said the extra Bank Holiday for the Queen's Diamond Jubilee made it even harder than usual to interpret the official estimates of growth.

BBC economics editor Stephanie Flanders points out that for the first time in a while, the Bank did not cut its growth forecasts.

For 2013, the Bank is predicting a pick-up in growth to about 1.8%.

The chief economist at the British Chambers of Commerce, David Kern, said: "While we agree that growth will gradually strengthen from the middle of 2012 onwards, the pace of improvement is likely to prove slower than the report predicts."

'Painful adjustment'

Sir Mervyn said the slowdown in inflation would aid economic recovery as people's spending power became less squeezed. Figures released on Tuesday showed that Consumer Prices Index (CPI) inflation slowed to 3.6% in January, from December's rate of 4.2%.

Savers have seen the value of their savings eroded by inflation, and have had to suffer low returns on investments due to low interest rates.

Sir Mervyn said these people, and the millions out of work had had their spending power reduced sharply.

He said although he had "deep sympathy" for savers, increasing interest rates from their record low levels to help them could be counterproductive as it would damage the fragile economy.

"These are consequences of the painful adjustment prompted by the financial crisis and the need to rebalance our economy," he said.

"Unfortunately there is no easy remedy."

Sir Mervyn said times remained "challenging" for the UK economy, and there remained a number of factors that were completely unpredictable.

As well as the chance of a eurozone breakup, for which he said contingency plans were being prepared - although he would not be drawn on detail, there were other potential political flashpoints.

"Disruptions to the supply of oil, for example from Iran or Nigeria, could pose an upside risk to the inflation outlook," he said.

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