Unit 2 Macro: Bank Cuts UK growth Forecast for 2012

The quarterly Inflation Report is an opportunity for the Bank of England to flesh out their latest forecasts and thoughts on the direction of the UK economy and it is safe to say that the May report will probably be best remembered for a remarkable statement from the Bank of England Governor Mervyn King.

“We have been through a big global financial crisis; the biggest downturn in world output since the 1930s; the biggest banking crisis in this country’s history; the biggest fiscal deficit in our peacetime history; and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution. The idea that we could reasonably hope to sail serenely through this with growth close to the long-run average and inflation at 2 per cent strikes me as wholly unrealistic.”

In short:

• Economic growth for 2012 - forecast has been cut to just 0.8%
• Consumer spending will continue to fall this year as real living standards for millions of people are squeezed
• The rising cost of borrowing in the wholesale money markets is increasing costs for banks and is putting upward pressure on the price of business loans and mortgages
• Now sees significant chance of negative annual GDP growth in 2012. Raises near term inflation forecast - CPI inflation inflation to fall back to target before the middle of 2013
• It may take a long time to get the UK economy back to previous growth / inflation paths: ““There’s no obvious reason to believe we can’t get back to original path [of economy pre-crisis] but may take 10/15/20 years” - a realisation of the severity of the shock to the global financial system and the aftermath
• Weak growth forecasts for 2012 assumes that there will not be a collapse / breakup of the single currency

Bank governor warns of eurozone crisis ‘storm’

Bank of England warns of euro crisis ‘storm’ (BBC news video)

A sticky wicket for the Bank (Stephanie Flanders)

Bank of England Inflation Report Data Sections

King on economic risks for the UK