UK economy forecast: Eurozone crisis dampens Bank’s growth estimate

 

THE Bank of England warned today that the eurozone debt crisis is the “single biggest risk” to the UK recovery as it forecast a dramatically increased threat of a double-dip recession next year. Its quarterly inflation report revealed a greater chance of the economy contracting in the first three quarters of 2012, compared with its August forecasts, as eurozone and banking concerns and squeezed household budgets continue to weigh on growth. The Bank slashed its central - or most likely - growth estimate to no more than 1 per cent in both 2011 and 2012 from previous forecasts of around 1.5 per cent and 2.2 per cent respectively. The worsened prospects for the UK economy mean inflation is likely to fall far quicker than previously estimated, hitting the Government’s 2 per cent target in the second half of next year before falling to as low as around 1.3 per cent in 2013. Bank governor Sir Mervyn King warned the “journey to a more balanced world economy will be long and arduous”. He said UK economic activity will be broadly flat until the middle of next year and added that the country faces a “difficult economic environment”. Today’s report backs the City’s view that the Bank will keep interest rates on hold for the foreseeable future and add another £75 billion to its quantitative easing programme by February. Vicky Redwood, chief UK economist at Capital Economics, said: “Even the Bank’s downgraded growth forecasts still look optimistic to us - we expect zero growth next year.”