Britain has only a one-in-10 chance of sliding into a full-scale recession, and the easing of growth caused by the slowdown in the global economy will prove short-lived, the Bank of England said Thursday.
In its first quarterly inflation report since the terrorist attacks in September, the Bank said the boom in consumer spending was compensating for the dire problems of manufacturing, helping to make the UK the best performing economy in the G7 group of leading industrialized nations.
"Growth is likely to slow over the next few quarters. But a slowdown is not the same as falling output," said deputy governor Mervyn King. He added that the Bank's nine-strong monetary policy committee, which last week cut interest rates to 4 percent, did not believe that a recession in the UK was the most likely outcome.
"In the short run, inflation may be a little below target. But the considerable policy stimulus -- both monetary and fiscal -- around the world should lead to a recovery in world activity and demand for UK output."
King warned that the cost of stoking up demand through cuts in interest rates meant that the imbalances in the economy between strong consumption and a weak trade position would continue.
Britain's appetite for imports and the difficulties facing exporters would result in net trade acting as a brake on growth for an unprecedented sixth successive year. "Further negative contributions are expected over the next two years," King added.
Despite the risk that at some point the current account deficit would trigger a collapse in the pound, King said the MPC had no choice but to cut rates aggressively, and that the policy to keep the economy moving appeared to be working. "So far, there have been few signs of any slowdown in consumption and the growth of total lending to individuals in the third quarter was at a 10-year high."
The inflation report disclosed that without the easing of monetary policy since the terrorist attacks, inflation would have been on course to come in well below the government's 2.5 percent inflation target.
"In reaching its decision at the November meeting, the monetary policy committee noted that the more subdued global outlook had weakened the outlook for UK growth and lowered prospective inflationary pressures."
"Without further action, there was a risk that inflation would significantly undershoot the target over the next two years and that activity would be lower than necessary."
King acknowledged that recent surveys of business and consumer confidence had reflected deep gloom in the wake of Sept. 11, with signs of further retrenchment in manufacturing, weaker investment intentions and a slowing of growth in the service sector. "But, although weaker, they have not fallen as sharply as in the rest of the world. At home, growth has remained higher than in any of the other G7 economies. And unemployment is now lower than in any other G7 country for the first time in more than 40 years.
"The fact is that domestic demand in the UK has been stronger than we expected and stronger than most expected."
King said the Bank expected the American economy to start recovering during next year -- although probably not until the second half of the year.
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