By Nick Mann | 3 November 2011
There is a 50% chance of the UK falling back into recession in 2011/12 even if the eurozone crisis is successfully resolved, the National Institute of Economic and Social Research warned today.
In its latest UK economic forecast, the research body said it expected economic stagnation to continue into the first half of 2012, with events in the eurozone adding to existing weak domestic demand.
The UK economy will grow by 0.9% this year and 0.8% in 2012 before returning to ‘more robust’ growth in 2013, the NIESR added.
But it stressed that its forecast was based on the eurozone crisis being successfully resolved. If not, the chances of the UK falling back into recession increased to 70%.
The NIESR said: ‘The economy will not return to its pre-recession peak until the end of 2013; this would be the slowest recovery since the end of the First World War.’
To address the situation, it called for more government action to encourage demand, labelling current short-term fiscal policy ‘too tight’ and calling for a ‘modest loosening’.
This, it claimed, ‘would improve prospects for output and employment with little or no negative effect on fiscal credibility’.
The NIESR also said weaknesses in the UK economy would affect the public finances – forecasting the current budget deficit for 2012/13 at 6.7% of gross domestic product, compared with the 4.5% forecast by the Office for Budget Responsibility in March 2011.
However, it labelled this situation ‘primarily cyclical and hence temporary’, and predicted the budget would return to surplus by 2016/17.
Its forecast follows the publication of stronger than expected growth figures for the third quarter of 2011 earlierthis week.
In a separate forecast for the global economy, the NIESR again warned of the negative impact of an unsuccessful resolution of the eurozone crisis.
If policy leaders ‘muddle through’ the crisis, it would create a 50% chance of a eurozone recession next year, it claimed. Under this scenario, while countries such as Greece, Portugal and Spain would not default, there would be no market confidence in them and they would continue to pay high interest rates on the bonds they issue.
It also reduced its baseline forecasts for global growth in 2011 and 2012 compared to its last forecast, down by 0.5% to 4%, largely due to increased uncertainty over the eurozone.
