Thinktank says slowdown in all global regions and ill-timed austerity measures have hit UK economy more than expected
Britain’s economic prospects are being hit by the first worldwide slowdown of the globalised era and austerity measures, one of Britain’s leading forecasting bodies said on Friday, as it scaled back its expectations of growth for both 2012 and 2013.
The National Institute for Economic and Social Research (NIESR) said “deterioration in the UK economy has been more pronounced than even we expected” as it warned output was on course to contract by 0.5% this year and grow by 1.3% in 2013. The forecasts suggest that the Bank of England’s monetary policy committee decision on Thursday not to announce any further action to support the economy this month, could give way to intervention next month, possibly in the form of a cut in interest rates from the current historic low of 0.5% or more electronic money printing.
NIESR has downgraded its forecasts recently amid evidence that every region of the global economy – including the fast-growing countries of the emerging world – has come off the boil.
“For the first time since the integration of the largest emerging market countries, the world economy faces a slowdown in every major economic region. In 2009-10 the emerging markets, China and India in particular, provided some support to world demand,” the thinktank said in its quarterly review.
“This will no longer be possible as these countries face familiar problems of their own. Around the world, banks are assumed to be insolvent until proven otherwise.”
NIESR said Europe was the centre of the debt crisis, and that there was a “stark choice” between forging economic and political integration or “accepting that at least one country leaves EMU and all the contagion risks this brings”.
Joint work by NIESR and the London School of Economics said that the government could have avoided the current double-dip recession had it delayed its austerity programme until the economy was stronger. Growth would have been higher and unemployment lower, according to the study.It estimated that over the period from 2011 to 2021 the cumulative loss of output caused by cuts during a depression rather than waiting for better times will amount to £239bn – or 16.5% of GDP.
NIESR said it had cut its current growth forecasts after an unexpectedly slow second quarter to 2012, in which the “jubilee effect” is estimated to have reduced growth by 0.4%. Though a boost is expected in the third quarter, overall growth is still expected to be negative for the year as a whole, whereas three months ago NIESR expected output to be flat.
The report stressed that “focusing on a ‘double dip’ distracts from the more important trend: the level of output has effectively been flat over the past two years”. This was mainly attributed to domestic economic factors.
NIESR said it was more optimistic about unemployment, predicting a peak in 2013 of 8.6% of the UK’s labour force. This figure comes in spite of their global forecast, which anticipates unemployment levels in some European countries higher than those seen during the Great Depression, due to weak world demand.
Globally, NIESR forecasts world growth to slow from 3.9% in 2011 to 3.3% this year, rising to 3.7%.
The report predicted divergent patterns amongst European countries, with Germany experiencing above-trend growth and southern European countries in recession. In order to maintain sovereign bond markets, Italy and Spain were expected to require some form of international financial support.
All major countries were anticipated to adopt similar policies of fiscal austerity and near-zero interest rates, but NIESR said that if the US went ahead with planned fiscal tightening worth 4% of GDP, the world’s biggest economy would sink back into recession.