Sir Mervyn King, Bank of England (BoE) governor, believes the UK’s economy will be broadly flat until the middle of next year.
He said the journey to a more balanced world economy will be “long and arduous”.
King said: “The immediate impact of the decline in sentiment is that the outlook for growth in the world economy has worsened since August.
“That is also true here in the UK where activity could be broadly flat until the middle of next year. We continue to face a difficult economic environment.”
He said growth over the next few quarters was likely to be markedly weaker than was predicted in the BoE’s August projection.
King said: “This reflects the impact on the UK of the deterioration in prospects internationally, working through weaker net trade, higher credit spreads and the likelihood that elevated uncertainty will cause businesses to postpone investment and households to spend less.
“Inflation fell back in October to 5%. Looking ahead, we can be reasonably confident that inflation will fall sharply at the start of next year as the contributions of VAT, energy and import prices decline. The extent and the pace of the fall however, remain uncertain.
“Real take home pay should gradually begin to recover after a period in which prices have grown faster than wages. It will be wrong though to think that monetary policy was the reason for the sharp squeeze in real take home pay. The squeeze was an unavoidable consequence of movements in world energy and other commodity prices that need to rebalance the UK economy and the cost of the financial crisis in terms of lower productivity."