Output growth in the United Kingdom eased in the second quarter and the central bank projects on Wednesday that the economy is facing further slowing in the third quarter, even a flat grow in the coming two years.

The monetary policy committee of the UK central bank, Bank of England, projected that the output to be "broadly flat over the next year or so, after which growth gradually recovers."

The Bank of England building in central London. Output growth in the United Kingdom eased in the second quarter and the central bank projects on Wednesday that the economy is facing further slowing in the third quarter, even a flat grow in the coming two years. (Xinhua/AFP file Photo)

The slow down is mainly caused by the decelerating consumer spending as households' real incomes were squeezed, the bank said in its quarterly inflation report released in the morning.

While residential and business investment prospects deteriorated, global economic activity was a little firmer than expected, but the near-term outlook for the advanced economies remained subdued, the report said.

The inflation report said that CPI inflation rose markedly, as energy and import cost pressures increased.

Household inflation expectations are rising, with earnings growth remained moderate, it said.

In the central projection, higher energy, food and import prices push inflation substantially higher over the next few months, though it might then fall back sharply to a little below the 2 percent target in the medium term.

But considerable uncertainty surrounds this outlook, with the main risks to inflation -- from a more pronounced slowdown in demand on the downside, and from the possible impact of a prolonged period of elevated inflation on pay pressures and inflation expectations on the upside -- have both increased since the bank's May report, Bank of England said.

Overall, the balance of risks to inflation is judged to be on the upside, the report said.

Increases in domestic energy and import prices are likely to erode households purchasing power further over the next year or so, the report said, listing tight credit conditions, marked weakness in the housing market as the main reasons.

The outlook for investment deteriorated as investment in dwellings declined in the first quarter of 2008 when he housing market weakened sharply and house builders scaled back construction, its said, adding that dwellings investment is likely to exert a sizable drag on GDP growth in the near term.

Though the expansion of global economic activity in the first half of 2008 was somewhat stronger than expected, the near-term prospects for activity in the advanced economies remained fragile, it said.

It is preliminary estimated that quarterly GDP growth eased to 0.2 percent in the second quarter, while the CPI inflation increased to 3.8 percent in June, the report said.

Manufacturing and service sector output prices rose, and near-term pricing intentions of businesses remained elevated, particularly in the manufacturing sector, the central bank report said.

An increase in longer-horizon expectations would be costly to reverse and would probably require a more pronounced slowdown in economic activity in order to achieve the inflation target, while the inflation outlook is unusually uncertain, it said.

The central bank noted that the immediate prospect was for CPI inflation to move substantially further above the 2 percent target, and for output to be broadly flat.

(Xinhua News Agency August 14, 2008)