Niesr predicts nastier future for UK economy

Economic thinktank’s forecasts for UK GDP next year and the year after undershoot the expectations of the Office for Budget Responsibility

The UK economy will only limp out of recession this year and growth in the following years will undershoot the expectations of the government’s fiscal watchdog, according to a thinktank.

The National Institute of Economic and Social Research (NIESR) predicts Britain’s GDP will grow by 1.3% this year, which is slightly more optimistic than the 1.2% forecast by the Office for Budget Responsibility. But as consumer spending fails to rebound and the government’s austerity plans bite, it expects growth next year to be only 1.7% and 2.2% in 2012, compared with OBR forecasts of 2.3% and 2.8%.

The independent thinktank predicts that public sector spending cuts by the new coalition government will subtract from economic growth in every year from 2011 to 2015. The quarterly outlook for the UK is its first in-depth analysis of growth prospects since George Osborne’s emergency budget in late June.

After official data last week showed the economy growing almost twice as fast as most economists had expected in the second quarter, NIESR warned the path ahead would still be “bumpy”. While its outlook did not specifically mention the risk of a “double-dip recession” it did say there were risks of growth disappearing in some quarters. For the third quarter it expects growth of 0.1%, followed by 0.3% in the fourth quarter.

“We should not rule out the chances of negative quarters,” said NIESR research fellow Simon Kirby. “The plans in the budget will inevitably hold growth back somewhat.”

In predictions likely to be welcomed by the government in its bid to rebalance the UK economy away from over-dependence on domestic spending, NIESR is gloomy about the prospects for consumer spending. It forecasts that per capita consumer spending will not return to its pre-recession peak until 2015.

The thinktank predicts the world economy will grow by 5% this year. This compares with a dip of 0.6% last year, with a rebound in world trade playing a large role in the recovery. But it forecasts the trade effect will wane in 2011 and domestic demand in major economies will fail to pick up the slack. At the same time many countries will embark in ernest on their fiscal consolidation plans and so growth will ease off to 4.4%, NIESR predicts.

Asia will continue to drive the global recovery, with exceptionally strong growth in China, India and Taiwan in particular, NIESR says. It believes China will overtake the US as the world’s largest economy in 2019, a year sooner than previously thought, largely thanks to China suffering relatively little during the global economic crisis.

Following its financial crisis earlier this year and the subsequent bailout, Greece remains under significant pressure from “stubbornly high” bond yields, the group warns. It estimates that if yields could fall back relative to German government bonds – also know as Bunds – to a spread last seen in January it would improve Greece’s large deficit by 0.9% of GDP and also significantly boost growth. So far that is not happening, but NIESR senior research fellow Dawn Holland says last week’s European bank stress tests may pave the way for Greek bond yields to now ease off as market confidence returns somewhat.

“With any luck we will start to see those Bund spreads coming down over the next few months and that should improve prospects for growth,” she said.