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Bank's forecast to be very downbeat

THREADNEEDLE STREET&rsquo;S latest growth and inflation forecasts published today are widely expected to be downbeat about the prospects for the UK economy, pointing to a weak recovery and the potential for further expansion of quantitative easing (QE).<br /><br />In light of last week&rsquo;s monetary policy decision and worse-than-expected second quarter GDP data, economists expect the Bank of England to downgrade its growth forecast.<br /><br />Fathom Financial Consulting estimates that GDP growth is between 0.5 and one per cent weaker than the Monetary Policy Committee (MPC) expected it to be in May, with a path of sluggish growth stretching out over the next few years.<br /><br />Although inflation has been particularly hard to pull down to below target over the past six months, deflation is seen as the bigger problem for the UK economy over the next three years.<br /><br />Simon Hayes, chief UK economist at Barclays Capital, expects the Consumer Prices Index (CPI) outlook to be similar to that published in May &ndash; which showed a significant undershoot of the target even at the three-year horizon.<br /><br />He does not expect a weaker outlook, as &ldquo;to do so would beg the question of why the MPC decided to extend QE by only &pound;50bn&rdquo;.<br /><br />Data released yesterday clouded the positive economic outlook from recent upbeat economic surveys. The UK&rsquo;s trade deficit widened in June to &pound;2.2bn, compared to an upwardly revised &pound;1.9bn in May, driven by a widening trade in goods deficit to &pound;6.5bn from &pound;6.2bn. But there was a glimmer of hope from a rare monthly rise in exports.<br /><br />Manufacturing firms have been constrained by lack of credit, despite their growing demand for financing, data from Markit showed yesterday. A tenth of UK manufacturing companies reported that credit availability has worsened compared to three months ago and is now constraining their business.