Bank: UK set to avoid recession

Feb 15 2012

The UK is likely to avoid recession as recent industry surveys have pointed towards renewed economic growth, the Bank of England has said.

However, the Bank warned the extent to which growth picks up is "uncertain" and depends on a successful resolution to the eurozone debt crisis.

In its last quarterly inflation report, the Bank held firm with previous forecasts for low growth and falling inflation but predicted a less severe risk of recession in the first of half of this year.

In its central projection, the Bank forecast gross domestic product (GDP) of around 1% this year and 1.8% in 2013, while inflation will hit its 2% target in the final quarter of 2012 and fall to as low as 1.5% the following year.

Bank governor Sir Mervyn King said: "We can take some reassurance from the fact that inflation is now falling. But we are steering a course through choppy waters, and many people are experiencing difficult times."

The mixed outlook is likely to raise questions over whether the Bank will inject more cash into its quantitative easing programme, after last week increasing the level by £50 billion to £325 billion.

Sir Mervyn said growth was likely to recover gradually, although "substantial headwinds" will hamper the recovery and there is likely to be a "zig-zag" pattern of alternating positive and negative growth.

The UK economy declined by an estimated 0.2% in the fourth quarter of 2011 and would return to recession with another contraction in the current quarter. However, the Bank said monthly output indicators for January pointed to renewed GDP growth, with output growing modestly at the beginning of this year.

The report said growth is likely to remain weak before strengthening as household incomes recover, supported by low interest rates and QE. There was some welcome cheer for homeowners as the Bank indicated interest rates would remain at their historic low of 0.5% until the end of 2013.

The Bank once again raised its concerns over the threat of the eurozone debt crisis, warning that reforms required to deal with those concerns would themselves weigh on growth. However, the Bank said a failure to undertake the reforms could lead to "disorderly" outcome which would hit UK exports and the country's financial sector.