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Bank of England Revises UK Growth Down to 1.4%

Wednesday, 10 Aug 2011 | 7:29 AM ET

The Bank of England (BoE) cut its 2011 gross domestic product (GDP) growth forecast for the UK for the seventh time since the end of the recession on Wednesday as more weak economic figures suggested the economy was struggling to maintain momentum.

Sharon Lorimer

The Bank's quarterly inflation report and growth expectations forecast a reduction of 0.4 percent in GDP to the end of the year taking it lower from 1.8 percent forecast in May to 1.4 percent now. The Bank said that UK economic growth "would remain sluggish in the near term".

Sir Mervyn King, the Bank's governor added that inflation risks to the upside remained, reiterating his view that "this is a long and deep squeeze on living standards". He said inflation could push beyond 5 percent before the end of the year.

King welcomed the recent fall in commodities prices and suggested "inflation should fall quite sharply next year". However he added, inflation was likely to remain high until the end of the year as the increase in energy prices took its toll on UK households. But the Bank governor said he expected the squeeze on living standards to fall into next year "if commodities prices stabilize."

The biggest risk to the UK economy was the state of the global economy, particularly slow growth in the euro zone, and the UK's ability to export, King said, adding that counties needed to work together to rebalance the global economy.

"We have all got to adjust the pattern of demand in our economies....that will require a great deal more cooperation that we have seen thus far," he added.

King also suggested the market's expectations for movement in the Bank rate currently at 0.5 percent would be the Bank's expectation, taken as an indication that the BoE would not change interest rates until well into next year.

Economists had told CNBC.com they expected the Bank's forecast to show a downward revision in growth of between 0.3 and 0.4 percent to 1.5 percent at best.

“It is very likely the Bank will revise growth down for this year. We are looking at a 0.4 percent revision for the reminder of this year and maybe a 0.2 to 0.3 percent revision for next year and something smaller for the year after,” George Buckley, UK chief economist at Deutsche Bank told CNBC.com

Buckley said he expected to the BOE to revise growth down to 1.4 percent, pointing out that this was a complete reversal of its initial prediction at the end of the recession in 2009.

“When the Bank made its first forecast for GDP at the end of 2009 they forecast GDP growth then at 4.1 percent since then it has revised growth down every single quarter. They thought we were going to get growth at a breakneck rate. And although this is not likely to be a big revision it is another revision,” he added.

Meanwhile, Peter Dixon, senior economist at Commerzbank Securities, told CNBC he expected the growth forecast for the remainder of the year to be no better than 1.5 percent.

For next year I think the Bank is forecasting growth of around 2.5 percent at the moment that will come down to at least 2 percent maybe even less, he said.

“What’s interesting is the nature of the risks. I rather suspect we are going to see rather a lot more downside risks compared with what we have seen over the last few months,” he added.

“I don’t see a big change in the inflation forecast but the focus of attention has switched over the last few months and the issue is about the Bank being criticized over inflation to now (being criticized over) growth. So it will be more about policy I think although the governor won’t say anything on that, we should be watching for hints in what he does say. And we won’t be seeing a rate hike until well into next year,” Dixon added.

Buckley added that while recent events including the equity markets sell off and the downgrade of US government debt by ratings agency Standard & Poor’s were a concern it was unlike the Bank’s report would make much reference to them.

“The Bank would have based its expectations on equity markets maybe falling by around 2 percent not 15 percent, so the report will probably not be that dovish but it will be worth looking out for the what the governor of the Bank has to say in his statement as he can change that and we might get a more dovish statement from him in light of the last week’s events,” Buckley added.

The Bank’s quarterly inflation report came a day after better UK retail sales figures for April were offset by weaker manufacturing output data

Retail sales grew at their fastest annual pace since April last month, helped by greater discounting, the British Retail Consortium said on Tuesday.

Total retail sales excluding automotive fuel rose by an annual 2.5 percent in June in value terms, up from 1.5 percent annual growth in June and the biggest increase in three months. For the three months to July as a whole, retail sales values were just 1.3 percent higher than a year earlier.

But factory output in the second quarter fell unexpectedly, and at its fastest rate since May 2009, according to figures published by the Office of National Statistics(ONS).

A 0.4 percent drop in factory output in June, and a failure of North Sea oil and gas output to get back on stream after maintenance in May, meant broader industrial output measure fell more than the ONS had assumed when it made initial calculations of second-quarter GDP last month.

Industrial output was 1.6 percent lower than in the first quarter, compared to the initial 1.4 percent fall the ONS had predicted.

And house prices in England and Wales continued to fall in July, although at a somewhat slower pace than the previous month, a survey showed on Tuesday.

The Royal Institution of Chartered Surveyors' seasonally adjusted house price balance rose to -22 from an upwardly revised -26 in June. This rise took the index to its highest level since April but was within broadly the same range recorded since the start of the year.

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