-UK GDP to contract 0.1% this year, bounce back by 2.3% in 2013

-UK CPI to fall to 1.4% in 2013.

-Unemployment to remain elevated throughout forecast period.

-Government should provide a clearly defined fiscal boost.

-Government could still meet fiscal targets.


In its latest economic forecasts, published on Friday morning, the National Institute of Economic and Social Research (NIESR) estimates that the United Kingdom's economy will return to a 'technical recession' in the first half of the year. Nonetheless, it does foresee a recovery, should the Eurozone crisis be solved, even if unemployment is being called to remain "elevated" during the forecast period.

The above as the crisis in the euro area, the UK's largest trading partner, robs the country of its main support, foreign trade.

In turn, that prolonged recovery process means that the output gap will be closed only very slowly, with unemployment rising to about 9% this year and remaining high throughout the forecast period. Even in 2014, it will still be over 7%, compared to the Office for Budget Responsibility's (OBR) estimate that the structural unemployment rate is about 5.25%, the think-tank explains.

Of interest, the NIESR claims that 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.

It is for this reason that the research institute believes that the government ought to make the most of its credibility with financial markets, as regards its commitment to sustainable public finances over the long-term, by giving a clearly defined and temporary boost to near-term demand.

As regards prices, the central forecast is that inflation will fall below the Bank of England's 2% target in the second half of this year.

AB

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