Bank of England Inflation Report May 2010: Pick-up in economic growth "likely", but recovery "remains uncertain"

The BBC reports that Bank of England Governor Mervyn King struck an upbeat note (external website) at the press conference to launch the report. But the report itself suggests a much more measured take on the UK's economic prospects.

Key points set out in the May 2010 Inflation Report include the following:

• GDP growth "uncertain". Economic recovery is ongoing, but its strength "remains uncertain". Recovery is expected to be aided by quantitative easing, projected global recovery, and "the past depreciation of sterling". But the report also cautions that " the pace of [...] recovery will be dampened by several factors: the need for a substantial fiscal tightening; further strengthening in the balance sheet of the UK banking sector; and the private sector's desire for higher savings in an environment of increased uncertainty." However, the Bank of England is confident that we are unlikely to see growth return to pre-recession levels any time soon. It says: "[T]he level of economic activity is very unlikely to return to its pre-crisis trend for a considerable period."
• Inflation to fall back sharply. The Bank of England believes the current spike in inflation is likely to be short-lived. In the medium-term inflation will fall back sharply as "downward pressure from the persistent margin of spare capacity [unemployment, in other words] is likely to cause inflation to fall below the [2% CPI] target for much of the forecast period [to the end of 2013]."
• Unemployment to remain high. Today's official data release from the Office for National Statistics (ONS) shows that unemployment continues to rise, even as tentative economic recovery gets underway. The Bank of England believes unemployment will remain high for an extended period, and that the impact of public spending cuts on public sector employment could contribute to this trend. The report says: "Companies are likely to seek to work off their internal spare capacity relatively quickly, but some degree of slack in the labour market may persist for longer, in part reflecting lower employment in the public sector."
• Pay awards: outlook uncertain. The Bank of England notes that downward pressures on pay awards now appear to be easing. However, the outlook is uncertain. The report says: "The near-term outlook for pay will depend in part on how important higher import prices, weak demand and heightened  concerns over cash flow have been in encouraging companies to hold down pay growth to date."

It will be interesting to see the extent to which the Bank of England's position changes when the next quarterly Inflation Report is published, in August 2010. The May 2010 Inflation Report notes that the Bank of England Monetary Policy Committee's forecasts for economic growth are based in part on plans set out in Alistair Darling's final Budget, which was delivered on 24 March 2010 (and therefore predated the 2010 general election campaign). The report says: "There was little news in those plans for the UK macroenomic outlook relative to the plans in the Pre-Budget Report 2009."