Bank slashes growth forecast
The Bank of England has slashed its growth forecast for 2012 to nearly zero, saying the UK economy has "not yet reached full fitness".
Delivering the Bank's inflation report, governor Sir Mervyn King said the economy was still “navigating rough waters” and claimed “stormclouds” in the EU would continue to hamper the recovery throughout the year.
"Anyone who pretends to know what will happen in the euro area for the next years is simply not being realistic," he told reporters.
"We will get back [to growth] but it's impossible to know over what time period."
In more positive news for the Government, the governor said inflation was now “within touching distance” of the 2% target and is likely to fall further.
George Osborne downplayed the negative aspects of the Governor's assessment, telling BBC News: “When you look at what the Governor of the Bank is saying he’s saying the economy is healing, and I think that’s significant but there are still many challenges and the job of the Government is to address those challenges, that’s exactly what we’re going to do.”
Labour, however, seized on the figures as proof that the Chancellor's policies are causing long term damage to the economy.
Shadow Treasury Secretary Rachel Reeves said: “This shows the permanent damage the Government’s economic policies are doing. The economy is not just struggling now, but will struggle long into the future too.”
But the Governor refused to back a 'Plan B' and said he was pleased that inflation was falling and that unemployment had not risen.
Sir Mervyn also claimed the large fall in construction output was not likely to be repeated, adding that the Q2 reduction in output - by half a per cent - would "unwind" in the third quarter.