Thursday 3 May 2012

NIESR's latest quarterly forecasts

NIESR's quarterly forecasts for the UK and world economies were published today, May 4.

In the UK, more than four years after the start of the recession, the economy is well over 4 per
cent below its pre-crisis peak. Growth this year will be close to zero, but about 2 per cent in 2013. We expect the unemployment rate to rise to almost 9 per cent at the end of this year, and to remain elevated throughout the forecast period. This will do permanent damage to the UK’s productive capacity.

The UK economy contracted in the first quarter of this year by 0.2 per cent. However, small quarter to
quarter movements of this sort are largely irrelevant to the broader picture of an economy that
remains very weak. This weakness is likely to persist over the next couple of quarters, and means that growth this year will be close to zero. But from the start of next year we expect more robust growth.

It remains our view that fiscal policy could be used to raise aggregate demand in the economy
with little to no loss of fiscal credibility. We have never and do not now advocate scaling back
the government’s medium- to longer-term policy of fiscal consolidation.  But a temporary boost to net investment, which has been cut extremely sharply, would have no direct effect on the government’s primary fiscal target of balancing the cyclic ally-adjusted current budget in 2016–17.

We forecast global growth of 3.7 per cent in 2012. Growth will  accelerate to 4 per cent in 2013. We assume a delayed but ultimately successful resolution of the Euro Area crisis. Nevertheless, we expect a mild recession in the Euro Area as a whole, as well as in the UK. Downside risks to the Euro Area remain high. Fiscal austerity will weigh on gr owth in the short term, while medium to long term structural problems remain unresolved.  We forecast growth of about 2 per cent in the US this year, while China and India , although s lowing, will continue to drive world growth.

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