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Britain’s economic recovery “looks to be under a cloud”, according to a major study of the state of the country’s finances.

The Bank of England’s chief economist Andrew Sentance’s report painted a dark picture for the future, citing weak productivity growth and falling household spending as three key threats to the recovery.

The MPC’s decision to cut UK interest rates to 0.75% on Thursday was seen as a step in the right direction, but it was not enough to save the economy, he said.

The BoE would need to cut spending by more to ensure the recovery continued.

Mr Sentance said the central bank now faced the stark reality that unemployment was already close to 8%, growth was still low, and the impact from the eurozone crisis was “very muted”.

‘Worries’, ‘gains’

Mr Sentance’s report, which uses a different methodology than the MPC’s and also includes growth estimates from the Office for Budget Responsibility, showed that the recovery was now on shaky ground.

Its most important weakness was that it did not yet look strong enough. Employment was not yet starting to pick up as quickly as it had in the pre-crisis years and household consumer spending could not yet have matched the rate of pre-crisis growth.

But the report does show that consumer consumption could be picking up soon as a result of greater wage generosity from the government, the availability of housing, and a weakening in the price of energy.

Mr Sentance said he was “very concerned” about the prospect of labour shortages. There were concerns about that too as firms were being forced to pay wages now only up to the level of unemployment, rather than until the jobless rate falls below 7%.

“A substantial proportion of the workforce – around one in every 50 people – will be worse off if we get to the point of this situation,” he said.

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‘No escape’

It was already starting to look like that fate could be on the cards. The MPC is likely to cut its forecast for UK unemployment this summer when it reviews the unemployment rate for June and July 2012.

This is likely to be the first time

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