Bank of England says UK economy set to shrink

ROBERT BARR

LONDON (AP) — Britain's weak economy may shrink in the last three months of the year and growth will remain sluggish into 2013, the governor of the Bank of England warned Wednesday.

The U.K. central bank's warning came after the country's gross domestic product on annual basis unexpectedly grew by 1 percent in the third quarter, ending a nine-month recession.

"Welcome as that is, it is not a reliable guide to the future," Governor Mervyn King said at a news conference introducing the Bank's quarterly Inflation Report.

"Output growth is likely to fall back sharply in Q4 as the boost from the Olympics in the summer is reversed - indeed output may shrink a little this quarter.," King said.

The bank also lowered its GDP growth forecast for 2013 to about 1 percent.

"We face the rather unappealing combination of a subdued recovery with inflation remaining above target for a while," the governor added.

King said the Bank "has not lost faith" in quantitative easing, the economic stimulus program of asset purchases which has pumped 375 billion pounds ($595 billion) into the British economy since 2009.

The growth spurt in the third quarter and the persistence of inflation above the official 2 percent target led the Bank's Monetary Policy Committee to decide against any increase in QE this month.

Despite the recent recession, the Office for National Statistics said Wednesday that that the U.K. unemployment rate fell to 7.8 percent in the July-September period, down from 8.0 percent in the previous three months and from 8.2 percent in the year-earlier period.

However, there was an increase of 10,000 in the number of people claiming unemployment benefits in the month of September. Martin Beck, an analyst at Capital Economics, says that may signal that the job market is starting to weaken again.

"The labor market's recent resilience may finally be starting to fade," Beck said.

Meanwhile the statistics agency said that pay growth of 1.8 percent in the last year continued to lag behind the rate of inflation, currently 2.7 percent.