-The economy will contract very slightly this year, but grow by just over 1 per cent in 2013
-CPI will be 2.7 per cent this year and 2 per cent in 2013
-Unemployment will continue to stabilise at about 8 per cent
-Cyclically adjusted current budget to be approximately balanced in 2016-17

The UK economy will not contract this year, but ill-timed fiscal consolidation in Europe and other external risks continue to pose risks, the National Institute of Economic and Social Research (NIESR) says in its latest quarterly forecasts.

The British economy is thus now expected to grow by 0.1% this year, which marks a slight upwards revision on its previous forecasts. Next year however the external environment is no longer being forecast to make a contribution to aggregate demand, leading the NIESR to reduce its forecast for gross domestic product (GDP) downwards, to 1.1%, as net trade will not make any positive contribution.

In any case, the research institute highlights the fact that overall - in the last two years- the economy has simply remained flat and output is still 3.3% below its pre-financial crisis peak.

Only in 2015 is economic growth expected to rise above the country's potential rate of 2% per annum.

Elaborating further on the above risks, the think-tank states that: "Risks to the UK economy are dominated by the external environment. Despite the uncertainty about the US 'fiscal cliff' and the degree to which emerging markets are slowing, from the UK perspective developments in the Euro Area are most important, both because of trade and financial sector linkages. The reduction in uncertainty in the Euro Area, following the announcement of the OMT, should - if sustained - provide some support to spending in the UK."

Nevertheless, economists at the NIESR do also poke their finger in the government´s eye, saying that: "The UK's poor growth performance over the past two years owes much to coordinated fiscal contraction, here and in the Euro Area."

More specifically, it goes on to describe austerity in the UK as "self-defeating."

As well, it advises that the UK Treasury should consider holding a public consultation on a new fiscal framework because the credibility of its existing targets is in question.

Lastly, the institute now expects that the cyclically adjusted current budget will be approximately balanced in 2016-17, and in surplus the year after, which will be the new target year post-Autumn Statement. However, public sector net debt as a proportion of GDP will not fall until 2017-18.

AB

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