By Max Clarke
Significant 'headwinds' are preventing the UK and other developed economies from attaining ‘meaningful’ economic growth, said the Bank of England’s Governor, Mervyn King as he published the Bank’s inflation report and growth forecast.
The UK’s GDP would grow by just 1.5%, said he, as the nation continues to grapple with austerity measures.
The prominent business organization and economic think-tank, the CBI (Confederation of British Industry), anticipated further economic strife and predicted 1.3% growth for 2011- below the Bank’s modest figure. CBI Head of Fiscal Policy, Richard Woolhouse comments:
“The Bank has lowered its expectations for growth for 2011, but predicts a gradual pick up next year, albeit with the pace remaining modest.
“This is similar to the CBI’s latest economic forecast, which predicted GDP growth of 1.3% in 2011 and slightly stronger growth the following year of 2.2%, as business investment strengthens and net trade makes a solid contribution.
“But as the Bank emphasised, uncertain global economic conditions are a significant risk to the outlook.”
Echoing Woolhouse’s grim forecast, the Chief Economist at the British Chambers of Commerce, David Kern, commented:
“The new Inflation Report highlights the difficult circumstances facing the UK economy over the next two years. The MPC has downgraded its growth forecast, but we believe this is still too optimistic. It is unlikely that annual GDP growth in the fourth quarter of this year will increase to two percent, and the pace of economic expansion predicted for 2012 also seems high. However, we agree that growth will remain in positive territory and there will be no double dip recession.
“This prediction is broadly in line with our own; that after rising further in the near term annual inflation will fall steadily during 2012. The forecast by the Committee implies that interest rates will remain at their current low level for an extended period, possibly beyond the second quarter of next year. Given the expected low growth and the squeeze facing businesses and consumers, it is important that interest rates remain low for as long as possible.
“The MPC was right to emphasise the worsening international background and the importance of supporting growth. But the government must play its part and continue to implement growth enhancing policies at this critical time for the UK economy.”
Jeremy Cook, chief economist at foreign exchange brokers, World First, argues that sub-par growth may lose the UK's AAA credit rating, with disastrous effects on the UK economy and on the credibility of the Coalition government.
“The Bank of England’s decision to slash its growth forecast comes on the back of a string of poor performance data from all sectors. The brief moment of optimism we saw after the Royal Wedding seems a long time ago now.
“If anything, this decision highlights the lack of clarity that everyone has about what is going to happen as we continue to stumble out of this recession.
“There are rumours that ratings agencies may view any growth downgrade as an excuse to reappraise the UK’s credit rating lower. If so, it will hamstring Osborne’s argument of austerity to prevent “becoming like Greece”.
“The fact of the matter is that the UK is like most developed economies at the moment, in that it is not experiencing meaningful growth. However, slow growth is preferable to the crushing debts that an expansionist fiscal policy would undoubtedly bring to the UK.”
Brendan Barber, head of the Trades' Union Congress, observes the long term stagnation as testament to the Coalition's excessive cuts agenda.
"This recovery is already the slowest on record, and the Bank's assessment that it may take another three years for us just to recover lost ground shows that the pain is set to continue to for some time.
"Even taking factors like the Royal Wedding into account, the Bank's report reveals that output over the last year seems to have grown at a rate below its historical average - which shows that our economic problems stretch far wider than just the last quarter.
"The long-term solution to plugging the deficit is sustainable growth - and as global economic challenges increase, the government's deep and rapid cuts are making this even harder to achieve."
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