Bank of England sees 'worsened' economic outlook

The UK's economic outlook has worsened and the economy could stagnate until the middle of next year, the governor of the Bank of England has said.

Sir Mervyn King also said that the eurozone debt crisis was the "single biggest risk" to the UK.

The Bank has cut its 2011 and 2012 growth predictions to about 1%.

It came as the UK unemployment total rose by 129,000 in the three months to September to 2.62 million, with youth unemployment above one million.

The unemployment total was the largest since 1994, and the unemployment rate rose to 8.3%, the highest since 1996.

Activity 'broadly flat'

Delivering the Bank's latest quarterly inflation report, Sir Mervyn said that the UK's economic problems were shared by other countries.

He said: "The immediate impact of the decline in sentiment is that the outlook for growth for the world economy has worsened since August.

"This is also true here in the United Kingdom, where activity could be broadly flat until the middle of next year."

The latest inflation figures showed that rate of Consumer Prices Index (CPI) inflation in the UK fell slightly to 5% during October, down from a rate of 5.2% the month before.

Sir Mervyn said inflation had peaked and was likely to fall sharply over the next few years.

Tough path ahead

The latest jobless figures showed that the number of unemployed 16 to 24-year-olds had broken the one-million barrier, rising to 1.016 million, according to the Office for National Statistics (ONS).

The data also showed that the number of women out of work increased by 43,000 to 1.09 million, the highest level since February 1988.

The number of unemployed people rose in every part of the UK, except for the East Midlands, where it remained unchanged, and the North West and Northern Ireland, where the number of unemployed fell.

The unemployment rate was highest in the North East, at 11.6%.

The ONS provided a regional breakdown for jobless figures around the country.

• In Scotland, unemployment rose by 5,000 to 215,000 in the three months from July to September

• In Wales, the number grew by 14,000 to 137,000

• In Northern Ireland, the total number of unemployed fell by 1,000 to 63,000

In addition to rising unemployment, Sir Mervyn said the problems surrounding the eurozone countries would continue to affect the UK, adding that the "uncertainty" would have "some potential impact" on business investment and household spending.

"Since August, difficulties in Europe have continued to dominate. The worsening global problems, imbalances and less competitiveness remain," he said.

"The move towards a more balanced economy is going to be long and arduous."

But the governor added real take-home pay should slowly start to increase next year.

City analysts said that both lower growth and inflation forecasts showed the Bank would leave interest rates at the low level of 0.5% into 2013.

"The report both endorses market expectations that rates will stay on hold for the foreseeable future and suggests that more policy loosening will yet be needed," said Vicky Redwood, chief UK economist at Capital Economics.

Eurozone funding

Regarding the current eurozone debt crisis, Sir Mervyn also gave support for the European Central Bank's (ECB) reluctance to bail out "deficit" countries in the eurozone, such as Italy and Spain, which are having growing difficulties borrowing from the private sector.

He said that the stronger eurozone governments needed to lend in a visible way to the weaker countries, rather than finance coming through the ECB.

BBC business editor Robert Peston said Sir Mervyn's comments may have killed off the idea that the ECB could become a so-called lender of last resort to governments experiencing funding difficulties.

"What the governor of the Bank of England has to say about the eurozone's crisis will resonate, simply because he is one of the big global figures in central banking," he said.