UK may fall back into recession in new year, says think tank

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Britain’s economy is facing a “bleak” new year, with a real risk of return to recession during 2012, says a centre-Left think tank.

The only good news for consumers is an expected fall in inflation, which will ease the squeeze on spending power in those households which remain in work, said the Institute for Public Policy Research (IPPR).

With no solution yet found for the eurozone crisis and many European economies already back in recession, the risk is that a mood of austerity will stunt the UK’s growth too, said the think-tank’s chief economist Tony Dolphin.

“As we enter 2012, it seems the word that best describes the outlook for the UK economy is ‘bleak’,” said Mr Dolphin.

“The eurozone crisis is unresolved and country after country is being forced to adopt extreme austerity measures that will result in large falls in output. As a result, the whole eurozone economy is believed to be back in a mild recession.

“Going into 2012, the risk is that talk of austerity at home and crisis in Europe will dampen spirits to such an extent that the economy drifts into recession.”

In the case of a “double-dip” recession, a return to growth will be possible only with a boost in public spending, a substantial increase in demand for British goods and services from overseas or if UK consumers and businesses are given a reason to spend more, said Mr Dolphin.

“The first is not going to happen, the second is extremely unlikely, and so we are left with the third,” he said. “But with no prospect of tax cuts or lower interest rates, it is not clear what in the short-term the catalyst for more spending by the private sector will be.”

The IPPR is calling on the Government to do more to boost the economy, including bringing forward the establishment of a National Investment bank and have it running by the end of 2012.

Mr Dolphin added: “The only good news is that a weaker global economy has led to lower global inflation pressures. Forecasters, including the Bank of England, think inflation will be close to its target rate of two per cent by the end of 2012 and... there is nothing in the latest data to suggest an alternative outcome is more likely.”

He concluded: “For the UK economy, 2012 is unlikely to be a happy new year.”