Mervyn King, governor of the central bank, said the bank now expects the economy to grow by only 1.5 per cent, following weak GDP figures for the second quarter and stock market chaos over problems with European sovereign debt.
He said: “There are a number of headwinds to world and domestic growth over the forecast period, not least the private and public debt overhang. And these headwinds are becoming stronger by the day.
“Reflecting this, and the prolonged period of economic adjustment facing some countries, the Monetary Policy Committee’s projections embody relatively slow growth in the euro area.”
King said the intensification of concerns over the Euro has been associated with renewed funding stresses for banks, which are contributing to high borrowing spreads and tight credit conditions for households and smaller companies.
He warned that a lack of bank lending would limit economic growth, adding: “It will take many years before bank balance sheets and fiscal positions return to anything like normal. In the meantime they will act as headwinds to the recovery.”
Richard Woolhouse, head of fiscal policy at the Confederation of British Industry (CBI), said: “The bank predicts a gradual pick up next year, albeit with the pace remaining modest.
“This is similar to the CBI’s latest economic forecast, which predicted GDP growth of 1.3% in 2011 and slightly stronger growth the following year of 2.2per cent, as business investment strengthens and net trade makes a solid contribution.
“But as the bank emphasised, uncertain global economic conditions are a significant risk to the outlook.”