UK will return to recession, says think tank

The UK will return to recession in the first half of 2012, according to the National Institute of Economic and Social Research (NIESR).

Stretched household finance, tight credit conditions and stagnant business growth is expected to drag the economy back into recession, according to the think tank.

It forecasts the economy to contract by 0.1 per cent this year, but grow by 2.3 per cent in 2013.

With regard to inflation, NIESR expects the Consumer Prices Index (CPI) to drop to 2.2 per cent in 2012, and 1.4 per cent next year – a significant drop from its current reading of 4.2 per cent in December.

The forecaster also expects unemployment to remain high – hitting 9 per cent this year – and to ‘remain elevated’ throughout the next few years.

Simon Healy, head of savings at Aldermore, says that the weak UK growth outlook will mean interest rates remain ‘low for some time’.

He adds: ‘People have seen the value of their savings progressively eroded over the last three years, so the forecasted drop in inflation offers a much-needed glimmer of hope for savers by boosting their real returns.’

NIESR believes the government’s austerity measures are having a detrimental effect on the UK’s growth. ‘The UK economy currently suffers from deficient demand; the current stance of fiscal policy is contributing to this deficiency,’ it says. ‘A temporary easing of fiscal policy in the near term would boost the economy.’

Meanwhile, the think tank forecasts the global economy will expand by about 3.5 per cent in 2012, with the emerging markets – China and India in particular – continuing to drive growth.

This year will see a ‘delayed but ultimately successful resolution’ of the eurozone crisis, despite the euro area falling into a ‘mild recession’, according to NIESR.

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