UK growth forecasts cut despite rise in employment
THE Bank of England is cutting its forecasts for UK economic growth, even as new figures showed a sharp rise in employment in the second quarter.
But analysts believe the fastest pace of job creation in 21 years is a sign of past growth, and the immediate future looks less rosy.
Support for that view came from a survey which found that British consumer confidence dropped in July for a third month, reaching the lowest levels since the depth of the recession early last year.
Launching the Bank of England's latest inflation report, governor Mervyn King said the overall outlook was weaker than that in the May report. He cited tight credit conditions and the planned severe budget cuts as risks to growth. The bank will not publish its detailed new growth figures until next week.
In May, its view was growth would be 1.7pc this year and 3.4pc next year. The 2011 growth could now be reduced to 3pc.
Despite the weaker growth, inflation is expected to be more persistent. The bank says it will probably not drop below the intended 2pc ceiling until some time in 2012. Earlier reports saw it as getting under 2pc by the end of this year.
The employment figures showed that an extra 184,000 jobs were created in the second three months of the year. Unemployment declined by 49,000, the biggest drop since 2007, but the numbers claiming benefit fell by less than economists expected.
"The rise in employment is very strong and suggests that we saw rising participation, and that's encouraging for the health of the economy," David Page, an economist at Investec Securities, told Bloomberg.
The unemployment rate fell to 7.8pc in the three months, down from 8pc in the previous period, "but it's the future we're looking at, not the past, and we're looking for growth to be pretty moderate", Mr Page said.
Rising prices, with inflation at 3.2pc in June, may be damaging consumer confidence. The Nationwide Building Society index of sentiment slumped 7 points from the previous month to 56 -- the lowest level since April 2009.
"July will have been a time for many consumers to reassess their individual circumstances following the chancellor's emergency budget," Martin Gahbauer, chief economist at Nationwide, said.
"It may be leading to more negative sentiment among consumers as they start to feel the pinch on their spending power."
Economists believe the risks to growth will weigh more than inflation on the Bank of England's Monetary Policy Committee, and it is more likely to loosen policy than to tighten.
"If it is necessary to respond, then we are prepared to do that," Mr King said. "It's much too soon to say that we're struggling to see a recovery."