Eurozone failure means 70% recession risk

By Alex Stevenson

Britain's economy could endure a double-dip recession before returning to robust growth in 2013, according to a GDP forecast out today.

The National Institute of Economic and Social Research (Niesr) suggested there was a 70% risk of a return to recession if policymakers do not get to grips with the eurozone crisis.

It reinforced the case for a rethinking of the government's deficit reduction strategy, but backed the Bank of England's quantitative easing strategy.

"It remains our view that in the short term fiscal policy is too tight, and a modest loosening would improve prospects for output and employment with little or no negative effect on fiscal credibility," Niesr said.

"The case for this approach has clearly been strengthened by recent developments, both domestically and internationally."

Labour said the government needed to come up with a 'plan B' by adopting a "more balanced deficit plan".

"These are really worrying forecasts for our economy, for families feeling the squeeze, young people out of work and businesses on the edge," shadow Treasury minister Owen Smith said.

"Trying to cut spending and raise taxes too far and too fast isn't working because the slow growth and higher unemployment the government has delivered will make it harder to get the deficit down."

Earlier this week initial official estimates of GDP in the third quarter put growth at 0.5%, but the Office for National Statistics said two quarters of 0.3% was a more accurate reflection of the economic situation.

Niesr said that weak domestic demand was responsible for the sluggish progress so far, meaning the negative impact of the eurozone crisis has yet to be felt.

Even with a successful resolution of the eurozone situation the risk of recession is 50%, it warned.

"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," its overview of the UK economy stated.

This would lead to a current budget deficit of 6.7% of GDP in 2012/13, significantly more than the Office of Budget Responsibility's March forecast of 4.5%.

"However, this deterioration is primarily cyclical and hence temporary," Niesr noted.

"Indeed, we project that the cyclically adjusted current budget will be in deficit in 2015/16, but will return to surplus the following year, hence meeting the government's rolling five-year forward target."