Rocky outlook for the UK economy says Bank of England governor

On top of this morning's unemployment figures the Bank of England have now added to the general gloom and despair in the UK economy.

At the launch of the Bank's inflation report Governor Mervyn King said that the outlook for growth of the world economy has worsened since August and that in the UK activity could be broadly flat until around the middle of next year.

The Bank has downgraded its growth forecasts to 1 per cent both this year and next - down from 1.5 per cent and 2.2 per cent respectively.

On the bright side the Bank is confident that inflation will fall sharply at the start of next year as the contributions of VAT, energy and import prices decline.

The extent and pace of the fall, however, remain uncertain said the governor in his opening address.

A key uncertainty surrounding the outlook for inflation concerns the impact of the financial crisis on the level of potential output in the UK economy, and for how long any adverse impact might persist.

According to their figures,measured productivity is around 10 per cent lower than would have been the case had it risen on its pre-crisis

King added that External factors are providing an unwelcome drag on growth in our economy, adding to the headwinds that we already face in the process of rebalancing towards a sustainable path of recovery.

One theory doing the rounds

Sam Coates has an insight into the apparent falling out of the Bank of England and the government.

One theory doing the rounds in government is that Merv was actually trying his hand at a touch of media management. The Governor nailed his intellectual sails to the quantitative easing mast, believing that printing money is needed to avoid deflation. But yesterday's CPI figures came as a worrying shock to Merv - 3.2 per cent. So he needed to create a distraction, to avoid questions being asked about his own decisions. Hence his little present for Gordon at the Treasury Select Committee yesterday. That, as I say, is one theory being talked about in Whitehall.

Mervyn King's comments last night that Britian stands on the brink of a prolonged recession may have been the obvious to those who have been reporting on the economy for the past 12 months but not it seems to the financial markets.

The pound fell in overnight trading aginst the Dollar and kicked off when markets opened this morning.It currently stands at $1.6405 just off its lowest levels.

Shares are also falling after overnight falls in the Far East.The FTSE is currently down 1.88%

Guido is in pessimistic mood

Government borrowing is at record levels, unemployment is heading towards two million, car workers are on a 3-day week, public sector workers are threatening strikes, nationalisation is back, Deripaska-owned Leyland is even in back the news and we are entering a recession. To complete the whole 70s era feel we have a sterling collapse. 6% last night, 20% since the beginning of the year.