Bank of England Warns of Triple Dip

Bank of England warns of triple dip


The Bank of England has warned that the economy is “quite likely” to shrink in the final three months of the year, bringing the recovery to an abrupt end, as it forecast that inflation will remain above 2pc “for the next year or so”.








The Bank of England is concerned about the UK'a ability to rebalance towards exports Photo: Reuters






By Philip Aldrick, Economics Editor

10:46AM GMT 19 Dec 2012


145 Comments




The warning on growth, made in the minutes to this month’s Monetary Policy Committee meeting, is in keeping with Governor Sir Mervyn King’s prediction that the UK faces a “zigzag” path to economic health, but will renew fears of a triple-dip.


The economy recovered from three quarters of contraction to grow 1pc in the third quarter but economists say it is potentially on course to shrink by 0.1pc in the final three months.


Underlining concerns, the minutes raised fresh questions about the vital rebalancing of the UK economy away from consumption and towards exports due to Britain’s weak productivity over the past two years.


Unit labour costs have risen 5pc in a year compared with “a historical average of a little over 2pc”, the minutes noted. The recent appreciation in the value of sterling against the euro has also worked against the UK’s export competitiveness, the minutes said, echoing Sir Mervyn’s recent call for a currency devaluation.


“The deterioration in UK competitiveness over the past couple of years represented a potential headwind to the ability of UK exporters to benefit from a pick-up in global growth,” the minutes said.



Related Articles

• 
  Debt Crisis: as it happened - December 19, 2012
  19 Dec 2012
  
• 
  Energy bill rises will outpace inflation next year
  12 Dec 2012
  

Inflation will be above the Bank’s 2pc target into 2014 but is out of policymakers’ hands, the minutes claimed. “Inflation was likely to remain above the 2pc target for the next year or so, owing in part to the continuing impact of the rise in university tuition fees and higher domestic gas and electricity and other administered and regulated prices.

“There was little that monetary policy could do to influence these prices directly. Even though they made up only 13pc of the CPI basket, they looked set to contribute around one percentage point to inflation in the near term. For inflation to be close to the 2pc target, the rate of inflation in those sectors influenced more by market pressures would have to be unusually low.”

Weak productivity posed another risk to the inflation target but the committee judged that “a gentle recovery in output growth would be accompanied by a commensurate increase in productivity, so reducing inflationary pressure from unit wage costs over the forecast horizon”.

The warning about inflation comes after the official rate for November held steady at 2.7pc. Most economists expect it to rise back above 3pc next year and for the Governor to have to write another letter of explanation to the Chancellor before he steps down in June.

“In the light of all this, the current size of the asset purchase programme [Quantitative Easing] seemed appropriate for the present,” the minutes said. On the Funding for Lending Scheme to push cheap credit through to borrowers, it said: “While it was too soon to assess the effectiveness of the FLS, the early signs of its impact had been encouraging.”

The minutes showed that the nine members maintained their positions from November, voting unanimously to hold rates at 0.5pc and overwhelmingly to maintain QE at £375bn. David Miles again as the lone voice for more QE, calling for a £25bn rise.

A separate Bank report found that businesses are planning to increase investment spending next year, but that the main hurdle remains confidence in the economic outlook. Businesses surveyed by the Bank plan to spend more on investment and reserch and development next year than in 2012.

“The most significant factor weighing down on investment plans over the next year was uncertainty about the economic and financial environment. The cost or availability of external finance, the availability of internal finance, and other factors, were constraining investment plans for only a small minority of firms surveyed,” the Bank’s agents report found.