The Bank of England has issued a stern warning that the immediate prospects for the British economy are worse than it forecast.
Governor of the Bank, Mervyn King said the economy had "only just started on the road to recovery" and is unlikely to revert to pre-crisis levels before 2011.
Launching the Bank's latest quarterly Inflation Report, Mr King, stressed that, while the economy may soon return to modest growth that was not necessarily a cause for celebration.
The fall in GDP had been severe - of about 6 per cent - and the 'prolonged period of balance sheet adjustment' now beginning would hold back growth.
Mr King said that output is "unlikely, at least for a considerable period, to return to a level consistent with a continuation of its pre-crisis trend".
The banks also said that inflation is 'more likely to be below the target than above for most of the forecast period, though by the end the risks are broadly balanced'.
The Report comes as the Office for National Statistics reported a stabilisation in the labour market, with an official 30,000 rise in the unemployment figures for September, to 2.46 million.
The bank said inflation will spike towards 3% next year as VAT returns to 17.5% and higher commodity prices feed through, before price rises again subside to 1%.
The Governor promised that the Bank would see through such volatility. That sentiment was welcomed by David Kern, chief economist at the British Chambers of Commerce: "It is important that legitimate worries over medium-term inflation risks do not become the trigger for an unduly early withdrawal of the quantitative easing programme."
However, the Bank did strike a more upbeat tone about the longer term outlook for growth, boosted by the Bank's £200bn direct injection of money into the economy through QE, a weaker pound and a stronger world economy.
The Bank forecasts growth will hit 4% year-on-year in mid-2011 before easing to around 3% in 2012. Overall, growth of about 2.1% is forecast for 2010.
Mr King said that he kept 'an open mind' about extending quantitative easing, remarks that pushed sterling sharply lower.