The UK economy, the third largest economy in Europe after Germany\'s and France\'s in nominal terms, grew by 1.1 per cent in the second quarter of 2010. This is the fastest growth in four years. Growth in Q1 of 2010 recorded 0.3 per cent and 0.4 per cent in Q4 of 2009.
Majority of economists in the UK poured cold water on Bank of England economic growth forecast for 2011 this week. They believe that real economic growth in 2011 will be 2.5% while Bank of England forecasted the figure will rise to 3.4%. The forecasts were based on some changes to the UK budget and further cuts in the future.
The UK outlook for economy seems to become gloomier when the Bank of England announced its latest forecasts against the context of planned tax rises and public sector cuts.
In its quarterly inflation report, growth forecasts are possibly lowered.
In the meantime, the Bank could raise inflation forecasts.
Governor Mervyn King and his fellow policymakers left interest rates at 0.5%, a low record. In addition, they left quantitative easing (QE) open wide.
UK economists Malcolm Barr and Allan Monks at JP Morgan said that although the forecast was uncertain, it was unlikely that the inflation reports would be very suggestive that another policy was set to be one way or another. Financial markets will wait for any signs.
The Bank will find it harder to set policy due to slow recovery and above-target inflation. The government set target of inflation at 2%, from 3.2% now without derailing the recovery.
MPC member Andrew Sentance was in favor of borrowing costs to be raised to 0.75% at June and July\'s rate-setting meetings. Andrew Sentence reasoned that policy had not been tightened for a long time while inflation was still high.
According to Nick Bate, economist at Bank of America in London, economists expect a first increase in bank rate in next May as the recovery is strengthening and inflation is scrambling.
According to some recent business surveys, business and consumer sentiment are still weak and several experts are worrying about a double-dip recession. Households are cutting down their expenses and companies in the main services sector are losing significant public sector work. Double dip recession intensified as service sector growth stalls.
According to survey of the sector, companies’ operation was being hurt by cancelled contracts. Therefore, they had to slash employment.
In addition, leading retailers warned that consumer spending is cooling off in the context of gloomy economic outlook.
However, the economy also welcomed some good signs in companies’ business results. Outstandingly, Insurer Standard Life PLC (LSE: SL.), a major asset managing company headquartered in Edinburgh, Scotland, reported 4.8% gain in its interim dividend and 10% rise in first-half operating profit.
Bank of England likely to cut growth forecasts