UK economy faces recession - report

February 4, 2012 - 14:35 AMT

PanARMENIAN.Net - The UK economy will enter recession in the first half of the year as households continue to cut back, an influential think tank has warned.

The National Institute of Economic and Social Research (Niesr) said the government should temporarily ease its spending cuts to promote growth. It expects the economy to shrink 0.1% in 2012, but to grow 2.3% in 2013 if the eurozone debt crisis is resolved. Niesr said, however, that deficit cuts had bolstered market confidence.

The UK is already close to another recession - defined as two consecutive quarters of economic contraction - after official figures in January showed that the economy shrank by 0.2% in the final three months of 2011.

In its UK and World Economy Forecast Niesr said: "We forecast a return to technical recession in the first half of this year, as households continue to retrench, credit conditions remain tight, and businesses are reluctant to invest given uncertainty about both domestic and foreign demand."

Niesr said economic conditions will not improve in the short term, as both the private the public sectors are still focused on paying off debts. "Over the near term we do not expect economic conditions to improve," the report said.

The think tank predicted that inflation would fall sharply, with the consumer price index down to 2.2% this year and 1.4% in 2013. But there were grim forecasts on unemployment, which Niesr expects will rise to about 9% this year, from 8.4% in the three months to November, and will remain above 7% in 2014.

"Unemployment at this elevated level for such a long period is likely to do permanent damage to the supply side of the economy, with large long-run economic costs," the report said.

Niesr suggests relaxing the government's austerity programme. "The UK economy currently suffers from deficient demand; the current stance of fiscal policy is contributing to this deficiency. A temporary easing of fiscal policy in the near term would boost the economy," the group said, according to BBC News.