Report likely to see growth trimmed back

Feb 8 2010 by Peter McCusker, The Journal

A CLEARER picture on consumer spending may emerge this week as firms such as Thomas Cook and Diageo are among those due to update the City.

The Bank of England’s much-awaited inflation report on Wednesday is likely to see rate-setters trim back growth forecasts following the UK’s sluggish pull out of recession.

The 0.1% first estimate for the final three months of 2009 marked a technical end to the slump, but was little cause for cheer with the market expecting a stronger advance.

The Bank surprised most forecasters with bullish predictions of a strong bounce-back in November’s report, which forecast the UK economy growing at a year-on-year rate of around 4% by the end of 2010.

But in comments with its latest no-change decision following the completion of its £200billion programme to boost the money supply this week, the Bank’s Monetary Policy Committee called the performance “sluggish“ and said the recovery would be “gradual“.

“Credit conditions are likely to remain restrictive, while the need to strengthen public and private sector finances will also weigh on spending,” the Bank said.

Investec economist Philip Shaw said: “It should be more apparent that the MPC’s previous projections...were too optimistic.

“The wording of the recent statement accompanying the interest rate announcement gave the impression that the committee is somewhat hesitant over recovery prospects. We would not be surprised if the Inflation Report contains a set of downgraded GDP projections from what looked a set of optimistic forecasts in November.”

Inflation, meanwhile, jumped at a record rate in December to 2.9% after higher petrol prices and VAT effects, and will almost certainly have breached 3% in January after the return of the tax to 17.5%. This will prompt another open letter from Governor Mervyn King to the Chancellor.