Bank warning fuels recovery anxiety
The Bank of England has fuelled anxiety over UK recovery hopes after warning of a squeeze on households from slowing growth and high inflation, as well as uncertain international prospects.
Governor Mervyn King said "a choppy recovery" for the UK was likely as the full impact of spending cuts in Chancellor George Osborne's emergency Budget kicked in next year.
The Budget's VAT hike and the looming threat of rising gas bills next year would also keep inflation above target throughout 2011, the Bank warned.
Its quarterly report painted a grim picture of disposable incomes hit by the deficit-tackling measures, with some firms facing lower public sector demand following the cuts.
Mr King said there was "great uncertainty" over the outlook for the US as well as the eurozone - the UK's biggest trading partner - hampering efforts to build an export-led recovery.
On Tuesday night, the US Federal Reserve said the pace of its own recovery had slowed and lifted its own efforts to boost the money supply.
The latest gloom comes after recent surveys showed a sharp slowdown in high street sales, falling house prices and consumer confidence at its lowest for more than a year.
Unemployment figures offered some relief, after jobless totals fell to 2.46 million in the three months to June - but the Office for Budget Responsibility (OBR) suggests around 600,000 public sector job cuts in the next five years are possible.
Mr King played down the impact of the Budget on recovery, as the quicker than expected moves to tackle the UK's dire public finances shored up international confidence and reduced the risk of rate hikes.
But the bank now estimates UK growth next year at around 2.5%, compared with 3.4% in its May report - still above the 2.3% predicted by the independent OBR.