BoE policymakers: UK economy has bottomed out

Britain is past the worst of the recession and should return to growth in the fourth quarter, two Bank of England policymakers said, in remarks which support government forecasts the economic downturn is nearly over.

Treasury sources told Reuters late on Thursday they expect the economy to grow 0.2-0.4 percent in the last three months of the year, bring to a close six quarters of contraction and Britain's longest recession in over 50 years.

Finance minister Alistair Darling is likely to stick with April's forecast of 1.0-1.5 percent growth for 2010 when the figures are reviewed in next month's pre-Budget report, the sources added.

This view chimes with the latest remarks from two members of the BoE's Monetary Policy Committee -- responsible for the central bank's 200 billion pound quantitative easing policy -- who see steady, if unspectacular growth next year.

Deputy Governor Charles Bean said the economy was currently bumping along the bottom after a disappointing performance in the third quarter. The recovery will be slow and protracted.

However, it would not surprise me if we see an expansion in the economy in the final quarter of this year, and further strengthening in growth after that, he was quoted as saying in the Newcastle Journal, a regional newspaper.

Bean added that a rise in value-added tax on January 1 as well as higher energy prices and sterling's weakness during the financial crisis were likely to cause inflation to spike -- possibly as high as 3 percent -- early next year.

But spare capacity in the economy would bear down on inflation after that, he said.

In a separate interview, policymaker Adam Posen said the Bank believed the economy has bottomed out.

There is still a lot of work to do and the country still has a lot of spare capacity but we are starting to see decent growth, Posen was quoted as saying on the Lincolnshire Echo's website. We think there is greater confidence than there was 12 months ago and interest rates have come down.

STILL IN RECESSION

Britain's economy shrank 0.3 percent in the third quarter of the year, to the surprise of almost all private-sector economists and leaving Britain in recession at a time when the United States, Germany and France were growing.

Darling is likely to revise down his forecast for British economic performance this year to show GDP contraction of around 4.75 percent versus April's forecast of 3.5 percent, Treasury sources said -- though they pinned most of the blame for this on unexpectedly weak output in the first half of the year.

The assumption is that the economy grew between 0.2 (percent) and 0.4 percent in Q4, one Treasury source said.

Darling himself appeared to lay the groundwork for a downgrade of the 2009 forecast in his pre-budget report on Dec 9 when he told Parliament on Thursday that his initial forecasts had been in line with most forecasters when it was made.

Since then, new data has shown that most economies, ours included, suffered a severe shock in the first quarter of this year, he said.

Deutsche Bank economist George Buckley said the growth forecasts looked achievable.

That sounds pretty reasonable, he said. 1.5 percent you could get with a fairly decent string of growth numbers, and you may get something relatively strong in the second half of 2010 -- after the VAT shock -- once you get the delayed impact of monetary and fiscal stimulus coming through.

Nonetheless, it would be a long time until economic output returned to its pre-crisis level, with Deutsche Bank not forecasting this will occur until 2012, Buckley added.

(Additional reporting by Fiona Shaikh and Sumeet Desai; Editing by Matthew Jones)