Markets plunge on fresh dip fear

GLOBAL markets plummeted yesterday after the Bank of England cut its growth forecast and the US trade gap widened dramatically intensifying fears of a double-dip recession.

On Wall Street, the Dow Jones recorded its biggest loss in six weeks, dropping 2.5 per cent to 10,378.83 and taking the index into negative territory for the year, while the FTSE 100 plunged 2.4 per cent to 5,245.21 – its biggest single-day percentage drop since 29 June. In Europe, leading indices followed suit with Paris and Frankfurt both closing more than two per cent lower.

The sharp falls came as Bank governor Mervyn King was forced to downgrade his forecasts for growth amid charges that he had been “wildly optimistic” in his earlier projections. The Bank now expects a “choppy recovery” with growth averaging 2.7 per cent in 2011, down from its forecast in May of 3.4 per cent, as chancellor Osborne’s public spending cuts, outlined in his June Budget, begin.

The Bank for the first time also indicated that there was an outside chance that the economy could dip back into recession, with its forecasts for growth suggesting that it was factoring in a three per cent likelihood of a renewed downturn.

Labour’s Lord Myners said King had “pointed the finger squarely at the government” in citing reduced confidence, limited credit and fiscal consolidation as “the things bearing down” on economic activity.

King’s downbeat outlook came as official data showed that the economy added workers at the fastest rate since 1989 in the three months to the end of June, but economists warned it would still not be enough to offset huge public sector job cuts in the offing. Employment jumped by 184,000 to 29m, the Office for National Statistics said, while unemployment on the International Labour Organisation measure fell by 49,000 to 2.45m.

But the government was quick to play down fears of a double-dip recession with employment minister Chris Grayling hailing the figures as a “good step in the right direction” and energy secretary Chris Huhne insisting the UK has “strong forces pushing us towards prosperity”.

Meanwhile, across the Atlantic the US monthly trade gap grew by a steeper-than-expected 18.8 per cent between May and June to $49.9bn (£31bn) – the highest since October 2008. Emerging just a day after the Federal Reserve’s renewed push toward monetary easing, the data confirmed fears of a weakening economic recovery.