UK recovery ‘likely to take longer’
Bank of England Governor Mervyn King said today that the ailing UK economy continued to “bump along the bottom”, although he held out hopes for a “gradual recovery” in output.
The Governor also said recovery from recession is “likely to be slow” and that there was “much uncertainty” both about the outlook for the world economy and the strength of domestic spending.
His comments came as the Bank's latest inflation report admitted that the UK's crawl out of recession last year was weaker than hoped and lowered November forecasts for the pace of the recovery.
Today's report predicts that inflation will spike at around 3.5% early this year — triggering another open letter to Chancellor Alistair Darling — before falling back below the Bank's 2% target.
“The UK economy has continued to bump along the bottom, but a gradual recovery in output may now be in prospect.
“There are signs that many economies are on the mend, although much uncertainty remains about the likelihood of a sustained rise in real final demand in the world economy as a whole,” said Mr King.
“Spare capacity will press down on inflation in the medium term. But the near-term outlook is for inflation to rise further as the restoration of the standard rate of VAT to 17.5% and higher petrol prices impact on the CPI measure of inflation,” he added.
The Governor said there will continue to be downward pressure on the supply of credit to households and businesses and on monetary growth, making it hard to know how sustained the recovery in spending will prove to be.
“It is perhaps even harder to judge the impact of the financial crisis and last year’s downturn on the supply capacity of the UK economy — both in terms of magnitude and persistence.
“Nevertheless, it seems clear that at present there is significant spare capacity in the economy that will act to dampen inflation,” he said.