Bank of England trims growth forecasts

11th August 2010, Comments 0 comments

The Bank of England cut its economic growth forecasts on Wednesday, but added that the recovery will continue, amid data showing the biggest fall in unemployment for three years.

The drop in unemployment appears particularly significant, given sharp debate in Europe over whether radical action to cut budget overspending might crimp recovery and drive up the jobless numbers, and also the latest downward adjustment for growth.

This is also a time of year when many school and university leavers are joining the workforce.

The British central bank forecast in a quarterly report that gross domestic product (GDP) growth would average about 3.0 percent over the next three years.

That was lower than the previous estimate of between 3.0-4.0 percent in May, owing partly to the impact of the government's recent austerity budget that was aimed at slashing the public deficit.

As governments across Europe take tough action to correct dangerous overspending, some circles particularly in the United States warn that this could slow recovery and even cause a new recession.

Others say that these governments have not choice, but also that corrective action will not necessarily put a brake on recovery. Some analysts said the latest fall in unemployment here might be short lived.

The downward revision of British growth came one day after the US Federal Reserve also cut its assessment of the US economy -- the world's biggest -- saying that growth "has slowed in recent months".

The BoE also forecast that annual inflation would hold above 2.0 percent until the end of 2011, owing to a looming increase in taxation on goods and services, before falling under the target level in early 2012.

Governor Mervyn King told reporters that Britain faced a "choppy recovery", adding that the growth downgrades were "modest".

In reaction to the report, the pound dived to 1.5672 dollars, touching a level last seen on July 30.

"The recovery is likely to continue," the central bank said in the crucial quarterly report.

"The most likely outcome for GDP growth is lower than in the May Report, reflecting the softening in business and consumer confidence, the faster pace of fiscal consolidation and a slower improvement in credit conditions.

"But the downside risks around this central projection are judged to be smaller than in May, due in part to the fiscal measures announced in the June budget reducing the chances of a sharp rise in long-term interest rates."

The BoE added that record-low interest rates and improving world economic growth would boost the economy.

"The considerable stimulus from monetary policy, together with a further expansion in world demand and the past depreciation of sterling, should sustain the recovery.

"But the strength of growth is likely to be tempered by the continuing fiscal consolidation and the persistence of tight credit conditions."

Britain's economy, which escaped from a record-length recession in late 2009, grew by 1.1 percent in the second quarter of this year -- the strongest pace since 2006.

Last week, the BoE froze its key interest rate at a record-low level of 0.50 percent, where they have stood for 18 months, despite high inflation.

Many economists predict inflation will spike when value-added tax (VAT) rises next January to 20 percent, from the current level of 17.5 percent.

In March 2009, the bank slashed rates to a record low and launched quantitative easing, under which it pumped 200 billion pounds (243 billion euros, 292 billion dollars) of new money to help drag Britain out of recession.

"The BoE report ... reinforces our view that the bank is most likely to keep interest rates down at 0.50 percent during the rest of 2010 and through the early months of 2011 at least, given likely bumpy and overall muted recovery," said IHS Global Insight economist Howard Archer.

He added: "There is clearly a very real possibility that the BoE could revive quantitative easing, should the economy falter appreciably over the coming months and/or credit conditions remain tight."

Meanwhile, data showed that the jobless total sank by 49,000 in the three months to June to reach 2.457 million people. That was the biggest quarterly drop since June 2007.

"The latest UK labour market figures showed that employment is rising strongly now that the wider economic recovery has gained some momentum," said Capital Economics analyst Vicky Redwood.

"But the looming fiscal squeeze suggests that this will be only a brief respite."

© 2010 AFP

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