LONDON — Britain's economy is likely to grow slowly this year in a "zigzag" pattern of quarterly gains and setbacks — barring a disaster in the eurozone, the governor of the Bank of England said Wednesday.
Introducing the latest quarterly Inflation Report, Mervyn King said austerity cuts at home and financial uncertainty among major trading partners in Europe are holding back growth.
The report prepared by the Bank's rate-setting Monetary Policy Committee forecast growth of 1 percent in 2012 and 1.8 percent in 2013.
Inflation, currently 3.6 percent, is likely to fall to the official 2 percent target by the end of the year, and be below target for much of the following two years, King said.
"Although some recent business surveys suggest a brighter picture for activity at the beginning of this year, the fiscal consolidation and tight credit conditions at home, and the weakness of our major overseas trading partners, are acting as a drag on growth," King told a news conference.
"The biggest risk to the recovery stems from developments in the euro area," he added.
The 17-nation eurozone is struggling to clinch a deal to save Greece from bankruptcy next month. Investors are wary about the region's high debt loads and the painful economic impact of spending cuts governments must push through.
"As in the August and November Inflation reports, the committee has judged that there is no meaningful way to quantify the most extreme outcomes associated with developments in the euro area," King said.
Some analysts noted that the Bank of England's forecasts suggest it may be entering a "wait and see" mode and could hold off on more monetary stimulus. This month, it announced a further 50 billion pounds ($79 billion) in "quantitative easing," the purchase of government bonds to increase the amount of money in the economy, taking the total to 325 billion pounds since 2009.
But Vicky Redwood, chief U.K. economist at Capital Economics, believes the Bank of England is underestimating the impact of the eurozone debt crisis and will have to support the economy with more stimulus.
"If growth is much weaker, as we expect, then QE is still likely to be extended further this year."
Britain's unemployment rate edged up to 8.4 percent in the last quarter of 2011, the highest rate since 1995, as 48,000 people lost their jobs compared with the previous three-month period and the economy contracted 0.2 percent, the Office for National Statistics said Wednesday.
The unemployment rate was up from 8.3 percent in the three months through September.
Wages excluding bonuses were up 2 percent, compared with 1.9 percent in the three months through November. Total pay including bonuses was up 2 percent, unchanged from the previous report.
Pay has increased slowly during a period when inflation shot as high as 5.2 percent in September. The latest data show inflation has dropped to 3.6 percent, and some analysts think it might drop to around 1 percent by the end of the year.
"The latest figures show some encouraging signs of stability despite the challenging economic climate," said David Freud, the minister for welfare reform.Comment on this story
"However, we are not complacent. With more people in the labor market we know that competition for those jobs is tough and we will continue to make it our priority to find people work," Freud added.
Blerina Uruci, analyst at Barclays Capital Research, expects unemployment to hit 9 percent in the second half of the year.
"A slowing economy will do little to encourage fresh hiring in the private sector and public sector job cuts are set to continue," Uruci said. "Furthermore, output per worker has yet to increase to its pre-recession levels and firms are unlikely to begin hiring aggressively with productivity this low."