16/05/2012 14:04 BST

Bank Of England Warns Diamond Jubilee 'Could Hit Economy'

The UK's recovery from recession will be hampered by people taking time off work during the Queen's Diamond Jubilee celebrations, the Bank of England has said.

The four-day holiday weekend may encourage businesses to arrange extended closures, or working to take extended breaks.

The Bank has warned of an expected reduction of 0.5% in GDP, making it harder for the UK economy to pull out of recession in the second quarter of the year.

The third quarter of 2012 is set to be boosted by a little more than 0.5% as it benefits from increased spending around the Olympics and as the economy catches up with the fall in output from the Jubilee.

The Bank's chief economist Spencer Dale said there was similar impact with last year's Royal Wedding, when growth was reduced by around 0.4 percentage points.

He added: "The Jubilee will have a slightly bigger effect in part because it's happening in June rather than April, so the ability for companies to make up that output within the quarter will be that much less."

The Bank currently believes the Olympics will have a "slightly" positive impact on the economy in the third quarter but warned its effects are difficult to predict.

It said the Sydney Olympics in 2000 boosted the Australian economy by around three-quarters of one percent and it has estimated that a similar pattern of spending would lead to a 0.2% rise in the UK.

Although most of the spending for the Games has already happened, there is likely to be "considerable expenditure" in the immediate run up to the Olympics and during them.

It said the London Organising Committee of the Olympic Games had only spent a quarter of its £2 billion budget by the end of March.

But it added that it is not clear to what extent tourism associated with the Games will be at the expense of other leisure activities. Some firms have already warned that tours to London are being cancelled around the Olympics.

And the Bank warned that transport disruption and more people taking time off work could hit production levels at businesses, particularly in London.

Mr Dale added: "Trying to work out how (the Olympics) will affect it is very difficult but our best guess is that it's likely to boost growth in the third quarter.

"The combination of the bounce back (from the Jubilee) and the Olympics we could see growth being exaggerated by more than 0.5 percentage points."

And the UK's growth is likely to be weakened in the fourth quarter of the year, as it returns to more normal levels following the Olympics boost, he added.