Nov 14 2012 By Cheryl Mullin
BANK of England governor Sir Mervyn King today warned that UK output may shrink again as the economy continues its “zig-zag” recovery.
Presenting the Bank’s quarterly inflation report, Sir Mervyn said GDP could decline in the final three months of this year after a return to growth in the third quarter gave an “overly optimistic impression”.
The Bank downgraded its growth forecast for 2013 to around 1% as it warned output will remain below pre-financial crisis levels for the next three years.
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 economy grew 1% between July and September, bringing the longest double-dip recession since the 1950s to an end.
But economists have warned this was largely influenced by one-off factors and the underlying picture remains weak.
In its report, the Bank said the economy is likely to see a “sustained, but slow” recovery and that the growth will remain below its historical average until mid 2015.
Sir Mervyn said: “Output grew strongly in the third quarter. Welcome as that is, it is not a reliable guide to the future.
“Just as growth in the second quarter was depressed by one-off factors and gave a misleadingly weak picture of the economy, so growth in the third quarter has been boosted by one-off factors and gives an overly optimistic impression of the underlying trend.
“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's report said: “The economy is likely to see a sustained, but slow, recovery over the next three years.''
And it ruled out a rapid pick-up in growth, adding: “Output is more likely than not to remain below its pre-crisis level until towards the end of the forecast period.”
The Bank said the outlook for UK growth remains uncertain with the problems in the eurozone still 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.