And inflation will be higher than expected, eating away at wages and keeping household finances under pressure.
Governor Sir Mervyn King did not rule out any further money printing in future, but did warn that the only real chance the economy has of returning to strong growth is by boosting exports – which is unlikely to happen when the global economy is so weak.
GDP growth hit one per cent in the third quarter, according to official estimates, but Sir Mervyn expects this boost to disappear by the end of the year.
“If the unfavourable world environment persists – and there is little sign of any change to the underlying problems in the Eurozone – it may be unreasonable to expect anything other than a slow and protracted recovery,” he said, predicting the economy will continue to “zigzag” as it has all year.
The forecasts also show the Bank expects inflation to stay above the two per cent target for the next 18 months.
However a major report from central banking heavyweight David Stockton this month revealed the Bank’s models consistently underestimate price rises – and Sir Mervyn yesterday revealed he has not yet taken action to improve the forecasts, meaning even these slashed forecasts may again be too upbeat.
“The growth forecasts for 2013 still seem pretty optimistic,” said Berenberg Bank’s Robert Wood.
“The Bank of England’s central forecast appears to be around 1.75 per cent on the year in 2013 – we expect 1.1 per cent.”
“The economy needs the boost, but with inflation heading up to three per cent in the next few months a move by the Bank in the near term is unlikely.”
Meanwhile Sir Mervyn was forced to deny he had bailed out chancellor George Osborne by agreeing to transfer £35bn to government coffers last Friday.
The profits of the quantitative easing programme are being given to the state, just ahead of the Autumn Statement – when Osborne had been expected to admit he had failed to meet his borrowing targets.
Although he is likely to give most of the cash back in the long run, it will give his numbers a useful boost next month.
But Sir Mervyn denied any political motivation or interference, and said that the transfers simply count as another £35bn of QE and so he will print less money in any future round of monetary easing than he would have done without the transfer.
MOODY’S EYES UK RATING
CREDIT rating agency Moody’s last night reiterated the UK’s triple-A credit rating but warned it would reassess it again early next year in the light of the slowing economy.
In its annual credit report on the UK, Moody’s said the economic recovery was likely to take longer than forecast as both the private and public sectors try to reduce their debt.
It warned the UK’s most significant policy challenge was balancing the need to cut the deficit against the need for economic stimulus.
It said it expected the upcoming Autumn statement on 5 December to clarify how the “government plans to manage this balancing act,” enabling it to better reassess the UK’s rating in early 2013.