Financial News

Zero growth for UK as double dip recession bites hard

Double dip recession is starting to bite and has forced the Bank of England to revise growth figures for the economy to a flat zero for the rest of the year.

Previously, the Bank had reckoned the economy would expand slightly – by just 0.8% after reining forecasts of 2% made a year ago.

The expectation is the Bank will cut interest rates further – which have stuck at a record low of 0.5% since March 2009 – or trigger another round of quantitative easing.

The candid assessment of the economy came in Bank governor Sir Mervyn King’s latest inflation report to Chancellor George Osborne.

“The big picture is that output has been flat for two years, and has continually disappointed expectations of a recovery,” said King. “We are navigating rough waters and storm clouds continue to roll in from the euro area.”

“Unlike the Olympians who have thrilled us over the past fortnight, our economy has not yet reached full fitness.”

He said that the future was unpredictable, since no-one could predict what would happen in the eurozone crisis, which would have an impact on the UK.

“It’s a saga that goes on, and on, and on. There’s still a long way to go,” he said.

King explained an interest rate cut would make “little difference” to the recovery and could damage financial institutions, like building societies, and could be “more counterproductive than beneficial”.

A Treasury spokesperson noted that the Bank cited the eurozone crisis as “the biggest single threat to the UK recovery” and added that the government was “doing everything it can to return the UK economy to growth”.

City analysts believe the Bank is waiting to see how current measures to revive the economy are working before taking further action. The latest round of quantitative easing is underway and the government recently launched the Funding for Lending scheme.

Azad Zangana, European Economist at Schroders, said: “The Bank takes the money market forward curve for its assumption on interest rates, and this is currently assuming an interest rate cut by the end of the year.

“Could the Bank cut interest rates further? The Monetary Policy Committee has certainly been considering the option during its monthly meetings. We believe that the bank may choose to hold off cutting interest rates further, at least until it can fully assess the impact of the Funding for Lending scheme. However, we do expect the Bank o continue its quantitative easing programme beyond the £375 billion of purchases currently planned.

“Governor Mervyn King is having to defend the Bank’s poor forecasting record once again. Some of the weakness of the UK economy is down to the crisis in Europe; however, this should not have totally surprised the Bank. We have certainly been warning of the downside risks for some time. And though King points to the range of risks rather than a spot forecast, it is clear that the Bank has been over optimistic on growth for some time.”

The office of National statistics confirmed output shrank 0.7% between April and June, following a 0.3% contraction in the first quarter of the year.

The Bank injected £50 billion in to the banking system as quantitative easing in July – taking the total investment to £375 billion, while the Funding for Lending program, is about to lend £80 billion at below-market rates to banks and building societies.

“Although its overall impact is uncertain, the early indications are positive, with some banks cutting their loan rates. By the time of our next inflation report in November, I hope it will be possible to say more about the initial effects of the scheme,” said King.

Rachel Reeves MP, Labour’s Shadow Chief Secretary to the Treasury, responded to the inflation report by saying: “With growth forecasts slashed yet again, not just this year but in future years too, it is clear that we cannot go on with the same failing plan from this government. The Chancellor’s policies aren’t only causing short term pain, but long-term damage to our economy too. Despite the crisis in the eurozone Britain is just one of two G20 countries in a double-dip recession.”

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