DISLOCATION in the financial markets and a slowing global expansion are hitting the UK hard and the risk of a recession is rising, said Lloyds Capital Markets in its quarterly report.
The bank has lowered its GDP growth forecasts from 1.3 per cent to 1.0 per cent for 2011 and from 2.3 per cent to 1.5 per cent for 2012.
Few forecasts exactly predict the future, and the report’s authors suggested that these downward revisions may not go far enough.
“Given the scale of the headwinds, we now believe there is a one-in-five chance that the UK will move back into recession at some point over the next 18 months,” they said.
Ongoing chaos in the Eurozone prompted the largest revisions to the outlook, because of its implications for trade. As the UK’s largest trading region, low demand damages prospects for exporters.
The inflation outlook, too, is uncertain. Corporate bankruptcies and a lack of investment could mean there is a lack of spare capacity, the report warned, “and so the UK could now be susceptible to a resurgence of inflationary pressures, even in the face of only a limited pick-up in demand.”
The new round of quantitative easing, launched last week, may exacerbate this risk. “It could stimulate inflation more than real GDP growth and may ultimately require a relatively rapid reversal in interest rates to put inflation back on a stable course.”