JOIN USThe downbeat assessment from the British central bank echoed warnings from the US Federal Reserve that the pace of economic recovery is slowing, raising fears of a double dip recession.
"It will take many years before bank balance sheets and fiscal positions return to anything like normal," said Governor Mervyn King, after unveiling the Bank of England's latest quarterly report.
The British central bank now expects gross domestic product to grow about 2.5 per cent next year, down from its forecast in May of 3.4 per cent, and predicts that inflation will stay above its 2 per cent target until the end of 2011.
But it adds that inflation is likely to fall below that target in 2012, to around 1.5 per cent, even if the bank raises interest rates from their current record low of 0.5 per cent. That, combined with the lower growth forecast, signals that the British economy may need more emergency stimulus.
The deterioration in the outlook from just a few months ago reflects a weakening in consumer confidence, the persistence of tight credit conditions and faster fiscal consolidation by government spending cuts.
Britain has elected a new government since the bank's last quarterly report and the Conservative-led coalition's emergency budget focuses on reducing the country's massive deficit via spending constraints.
The government's plans to raise consumer sales tax, or VAT, from the start of next year are a key factor in the revision of the forecasts.
"The overall outlook is weaker," said King. "Business andconsumer sentiment have shown signs of softening, measures of financial fragility remain elevated, and there is great uncertainty about the outlook for both the United States and our most important trading partner, the euro area."