UK set for return to recession – NIESR

The UK and Europe will both slip into recession in 2012, according to the National Institute for Economic and Social Research (NIESR).

The UK only has a one in four chance this year of avoiding a ‘technical recession’, defined as two consecutive quarters of contraction, according to research from the leading think-tank.

NIESR has forecast a contraction in the economy of 0.1% for the year as households continue to retrench, credit conditions tighten and businesses show a reluctance to invest. However, it is predicting 2.3% growth for the following year.

NIESR warned if UK unemployment remains at an elevated level for some time, it could do permanent damage to the supply side of the economy, with large long-run economic costs.

“Assuming a successful resolution of the euro crisis, we expect growth to pick up in the second half of the year, and to accelerate somewhat in 2013,” it said.

NIESR added Europe is unlikely to escape recession this year, pointing out net trade provided the only significant positive contribution to growth in 2011.

“Financial instability resulting from the euro crisis, combined with fiscal austerity measures, will take their toll on growth in Europe, and to a lesser extent in the US,” it said.

“Our central forecast assumes that economic and monetary union remains intact, and a decisive agreement will be reached by the second half of 2012 which will ensure European sovereigns are able to meet their borrowing needs at reasonable rates of interest,” the report read.

NIESR also expects global growth of 3.5% for 2012 and 4% for 2013, a downwards revision from its last forecast. It predicts 2% growth in the US, while China and India, although slowing, will continue to drive world growth.

It said encouraging data has led it to forecast moderate growth in the US and Canada, while in Japan, post-earthquake reconstruction will support growth, albeit in a deflationary environment.

“In China, there is some evidence of rebalancing from exports to consumption, and we project only a gradual slowdown.”

 

This article was first published on Investment Week

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