Bank of England cuts growth forecasts

The Bank of England (BoE) has warned that a possible war with Iraq has put further pressure on an already troubled economy.

House price inflation appears to have passed its peak

Mervyn King, Bank of England deputy governor

That means that prospects for economic growth are now much weaker than when forecast in November.

The Bank also predicted the house price boom would cool considerably in the next two years and that any improvement in business and consumer confidence would be very gradual.

"The unusual uncertainty relating to the duration and impact of a possible war in Iraq has led the MPC (Monetary Policy Committee) to widen the range of possible outcomes," the Bank said.

Consumer nerves

The bank said it now expected the UK economy to grow 2.5% this year, instead of by the 3% it had previously predicted.

It is forecasting 2% growth in 2004.

UK unemployment

UK unemployment falls to a 27-year low

Average earnings up 3.7% in 2002

3.1% of workforce claiming unemployment benefit

Click here for more on the latest figures

The BoE's dampened outlook is the latest challenge to the Treasury's forecasts for 2003.

Gordon Brown's pre-Budget report in November predicted that the UK economy would grow by 2.5%-3.0% this year, hitting 3.0%-3.5% in 2004.

Philip Shaw, chief economist at Investec Bank, said: "The Chancellor's projections looked optimistic in November and look even more so now."

Earlier this month, both the accountancy firm BDO Stoy Hayward and the National Institute of Social and Economic Research suggested Mr Brown's predictions had been too optimistic.

Click here to read more about challenges to Gordon Brown's forecasts

Housing slump

The BoE's deputy governor, Mervyn King, said house price inflation was also expected to slump from 25% to zero in the next two years.

"House price inflation appears to have passed its peak," Mr King said.

He added that consumer spending was showing signs of a "marked slowdown" and said the rate of recovery depended on the length of any possible action in Iraq.

"Uncertainty surrounding military action in Iraq hangs heavily over the short-run outlook for the world economy," said Mr King.

Rate cut savings

The Bank's first inflation report this year suggested the moderate consumer spending would be offset by "robust growth" in public expenditure and a "gradual pick up" in investment and exports.

The bank surprised the market earlier this month by cutting interest rates to 3.75%.

It said that without the cut, inflation would have headed below the 2.5% target.

Employment figures also released on Wednesday painted a warmer picture.

The number of people out of work fell to a 27-year low in the three months to December, indicating a a resilience to the weak economy.