Bank warns of 'storm for Europe'

First published in Business Daily

© Press Association 2011

BANK of England governor Sir Mervyn King has warned of the "risk of a storm heading our way from the Continent" as he flagged the eurozone as the greatest threat to the UK's recovery.

Sir Mervyn's warning came as the Bank said the UK economy will not return to pre-financial crisis levels before 2014 after it cut its growth forecasts for the next two years. The Bank now expects growth of around 0.8% this year.

And the squeeze on consumer spending is set to maintain its grip as the rate of inflation falls more slowly than previously expected, remaining above the Government's 2% target for the next year or so.

While the Bank said it did not see a "meaningful way" of factoring in an extreme financial event - such as the collapse of the euro - into its projections, it said the biggest risk to recovery stems from the single currency bloc, the UK's main trading partner.

GDP is expected to grow around 2% in 2013, compared with the Bank's previous estimate of around 3%.

Meanwhile, the consumer prices index rate of inflation is not likely to meet the 2% target until mid-2013, rather than the end of the year, and will still be around 2.5% at the end of this year.

Sir Mervyn said weak growth and high inflation have been the unavoidable consequences of the financial crisis, that have been "painful for everyone in our society".

However, Sir Mervyn said the bigger picture was one of gradual recovery in growth: "We are navigating through turbulent waters, with the risk of a storm heading our way from the continent."

Prime Minister David Cameron's official spokesman said: "What... the Bank of England forecasts reflect are the same issues taken into account by the Office for Budget Responsibility when it produced its forecasts at the time of the Budget.

"The governor is highlighting higher-than-expected inflation and obviously the biggest risk to the economy is what is happening in the eurozone."

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