Bank downbeat on growth prospects
Economic growth will remain below pre-financial crisis levels for at least the next three years, Bank of England governor Sir Mervyn King has warned.
Taking the shine off a recent return to growth between July and September, Sir Mervyn said output could shrink again in the final three months of the year.
And the governor braced households for an "unappealing combination" of sluggish growth and above-target inflation as he presented the Bank's latest gloomy quarterly inflation report.
The economy grew 1% in the third quarter, bringing the longest double-dip recession since the 1950s to a close, but experts warned the underlying picture is bleak.
Sir Mervyn said the figures gave an "overly optimistic impression" and were not "a reliable guide to the future". He said: "Continuing the recent zig-zag pattern, output growth is likely to fall back sharply in the fourth quarter as the boost from the Olympics in the summer is reversed - indeed, output may shrink a little this quarter."
The Bank downgraded its growth forecast for next year to around 1% and warned that output will remain below its historical average until mid-2015. It also revised its inflation forecast, with the rate expected to fall towards the 2% target in the second half of next year, later than previously thought.
The Bank said the outlook for UK growth remains uncertain, with the problems in the eurozone remaining a major threat to the recovery. The pace of the recovery will also depend on the extent to which recent reductions in bank industry funding costs spur an increase in lending, the Bank said.
David Kern, chief economist at the British Chambers of Commerce (BCC), said the Bank's report paints a "grim but realistic" outlook for the economy, adding: "The Government should accept that the private sector must be the main driver of any sustainable recovery, and therefore should adopt the necessary growth policies that will make such future growth possible."
Vicky Redwood, chief UK economist at Capital Economics, said the report "suggested that the door remains wide open to more quantitative easing" and predicted a further increase of £50 billion in February, bringing the total to £425 billion.
Shadow chancellor Ed Balls said: "This sobering report shows why David Cameron and George Osborne's deeply complacent approach to the economy is so misplaced. Their failing policies have seen two years of almost no growth and the Bank of England is now forecasting lower growth and higher inflation than just a few months ago."