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Government needs to dial down the austerity - NIESR

Posted by Gary Flood on Fri, 03/02/2012 - 10:47
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The UK economy will enter recession in the first half of the year as consumers continue to cut back, the National Institute of Economic and Social Research has today warned.
 
In response, the government should brake the speed of its austerity measures, the influential think tank believes.
 
"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,” it notes.
 
"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.”
 
UK GDP will shrink by 0.1% in 2012, which would make it a technical recession (two quarters of negative figures) - but could bounce back very well, growing 2.3% in 2013, if the eurozone debt crisis is resolved, it claims.
 
Still, 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
 
On the employment front, the analysis suggests this may rise to around 9% this year, from 8.4% in the three months to November, and will remain above 7% in 2014 – a state that could cause structural damage long-term: "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 authors believe.
 

The report also considered the monetary and fiscal policy choices facing Scotland if it leaves the UK, saying there were definite risks: “Scotland would enter independence heavily indebted with no insurance from fiscal risk sharing or fiscal transfer mechanism with the rest of the UK… Even with a favourable settlement on future oil revenues, its fiscal balances are likely to be volatile with large deficits in some years as a result of its dependence on oil revenues," the report warns.