Although painting a better picture for the UK in a few years to come, the National Institute of Economic and Social Research points to the UK having a difficult time in the near future.
The NIESR says that the UK economy will grow by 0.9% this year followed by just 0.8% in 2012, which is more than half the previous forecast for next year. It also backs up the Bank of England’s view that inflation will drop back next year by saying that CPI will fall from this year’s 4.4% to 2.3% in 2012, even ending the year below 2%.
The current economic stagnation is put down mainly to a lack of domestic demand at the moment, but uncertainties in the Eurozone could well further reduce UK economic growth as time goes on.
The NIESR ‘…assumes a successful resolution of the euro area crisis; there are therefore significant downside risks’.
It estimates that the chances of a technical recession are close to 50% if there is a successful end to the Eurozone crisis. But if the Eurozone members decide to ‘muddle through’ their problems then the chances of a UK recession increase markedly to 70%.
The overall weakness of the UK economy over the next few years will also affect public finances with the NIESR predicting a budget deficit of 6.7% in 2012-2013, a lot higher that the Office for Budget Responsibility’s projection of 4.5%. But the NIESR does say that this is cyclical and we will be in surplus by 2015-2016.
The Bank of England’s decision to go for another round of quantitative easing is seen as ‘appropriate’ by the NIESR, but it wants to see more fiscal loosening.
So, some more tough years ahead as long as the Eurozone keeps its act together. Batten down the hatches if they can’t.