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UK will grow in first quarter, Bank of England predicts

By Richard Johnstone | 13 February 2013

The Bank of England today predicted that the UK economy would avoid a ‘triple-dip’ recession by growing in the first three months of this year.

Bank of England says UK will avoid triple dip recession
Photo: Sam Kesteven

In its quarterly Inflation Report, Bank governor Sir Mervyn King said that, although economic growth was ‘likely to be weak in the near term’, there was ‘cause for optimism’ that the UK was recovering.

King said the ‘weakness’ in the economy in the past two years, including a double-dip recession, was due to a fall in construction output that was ‘unlikely to be repeated in 2013’.

This meant the economy would avoid a second quarter of falling output, following the 0.3% fall in the fourth quarter of 2012. A second consecutive quarter of decline would mean the UK was back in recession.

‘The UK economy is therefore set for a recovery,’ King said. ‘That is not to say that the road ahead will be smooth. This hasn’t been a normal recession, and it won’t be a normal recovery.’

The report also said that the Consumer Prices Index measure of inflation was likely to stay above the Bank’s 2% target for the next two years.

Inflation had remained ‘stubbornly above’ the target and was now likely to rise in the short term, King said. Yesterday, the Office for National Statistics said inflation had remained unchanged in January at 2.7%.

Any attempt by the Bank’s Monetary Policy Committee to bring down inflation sooner would risk ‘derailing the recovery’, King added.

‘So long as domestic cost and price pressures remain subdued, we will continue to look through the temporary, albeit protracted, period of above-target inflation in order to support the recovery in growth and employment.’

King, who will step down in June, added there were ‘limits’ to how much the Bank could boost domestic demand through monetary stimulus.

‘If we are to see a return to growth and stability over the next 20 years, not only the UK economy, but the world economy as a whole, must find a way to a new equilibrium in which there is a rebalancing of world demand.

‘Those are not challenges that can be resolved by monetary policy alone, nor can they be resolved by any one country alone.’

Meanwhile, the CBI cut its projection for economic growth in 2013. The business lobby now estimates that growth will be 1% in 2013, down from its projection of 1.4% in November.

Director general John Cridland said this was in response to the contraction in the fourth quarter of 2012. Quarter-on-quarter growth is expected to be 0.3% in the first quarter of the year, and stay between 0.3% and 0.4% for the rest of 2013, he said.

Next year, the CBI is expecting growth of 2%, which is unchanged from its last forecast.

‘We are beginning to see the return of organic growth, with clear signs that firms offering the right products into the right markets are growing sales and expanding,’ Cridland said.

‘Recent business surveys also give grounds for cautious optimism about our forward prospects. Looking ahead, external risks to the outlook in the eurozone and further afield are likely to keep growth at home and abroad in check.’

The CBI agreed with the Bank of England’s prediction that inflation would increase in the months ahead. However, it projects that the CPI will fall back in the second half of this year, and be close to the 2% target in 2014.

Unemployment is unlikely to change significantly over the period, the forecast added, staying around its current level of 2.5 million in 2013 and falling to 2.42 million in 2014.

Growth forecasts will be updated at next month's Budget.

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