The latest Bank of England quarterly inflation report suggests a weaker outlook for economic growth combined with a longer period of higher price inflation.
Commenting on the publication of the report, Bank of England Governor Mervyn King explained that UK economic output has been broadly flat for the past 18 months.
The size of the UK economy remains 4% smaller than it was in 2008, before the onset of the global financial crisis. The economy is not expected to return to its pre-crisis size until 2014 at the earliest.
Whilst price inflation has fallen back from its peak last September, it remains stubbornly above the 2% government target for the Consumer Prices Index.
The Bank has published a weaker economic growth forecast than the one described in their February report.
They have cut their economic growth forecast for 2012 from 1.2% to 0.8%.
Perhaps most surprisingly from this report was the expectation from the Bank that the UK economy will experience a 0.5% decline as a result of lost productivity from the Queen’s Jubilee and London Olympics.
They predict a gradual recovery in economic output, with subdued domestic cost pressures allowing price inflation to fall once external pressures fade away.
A recent return to recession, following negative GDP in the final quarter of last year and first quarter of this year, was caused by higher than expected world commodity prices and tighter credit conditions. This second factor is influenced to some extent by the current troubles in the eurozone, with banks exposed to this sovereign debt crisis.
UK economic growth in the future will depend on higher consumption once take-home pay improves, more corporate investment and support from net trade. The Bank is assuming that interest rates will stay at their record low and the size of their asset purchase programme will remain unchanged.
The eurozone crisis is unsurprisingly identified as the biggest threat to the UK economy.
King has confirmed that the Bank is drawing up plans to deal with the break up of the single currency. This comment is likely to further spook investors who are already nervous about the continued membership of Greece and now Spain in the euro.
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