Recession looms - or does it?

A think-tank reckons that recession looms large for the UK economy. Although PMI figures seem to show otherwise.

by Emma Haslett
Last Updated: 06 Nov 2012

Well, here’s a surprise: boffins at the National Institute of Economic and Social Research (with a name like that, it’s got to be good) reckon the UK economy is on-course to enter recession in the first half of the year, shrinking by 0.1% during 2012 (following its 0.2% contraction in the final quarter of 2011). The good news is that we’ll grow by about 2.3% next year. But until then, it warns, the Government will have to cut back on those austerity measures and inject a little more than it had planned into the economy. Then again, service sector figures suggest quite the opposite…

A breakdown of Niesr’s report makes for pretty grim reading: while inflation will fall to 2.2% this year and 1.4% next year, the think-tank expects unemployment to rise from 8.4% in the three months to November to 9% at some point this year – and it expects it to stay above 7% until as far ahead as 2014. All of which does seem to corroborate with stats out this morning from the Insolvency Service, which said the number of firms going bust rose by 1.3% last year. Unsurprisingly, it added that having so many people out of jobs for such a long period of time is ‘likely to do permanent damage to the supply side of the economy, with large long-run economic costs’.

But there is a way the Government can minimise those costs, it added. It’s simple: cut back on austerity measures. That echoes a report by the Institute for Fiscal Studies which came out earlier this week, suggesting that when the Chancellor delivers his budget in April, the economy will be ‘in considerably weaker shape than he had hoped a year ago’. And, it pointed out, making the odd tax cut probably won’t entirely derail the Government’s long-term fiscal goals, or even necessarily cause the Bank of England to raise interest rates in response…

The other interesting part of the report was its look at what would happen if Alex Salmond got his way and Scotland left the United Kingdom. Niesr recommends that it retains sterling, but warned that it’s ‘doubtful’ whether the Bank of England would lend to Scottish institutions if they got into hot water. So perhaps it’s worth waiting until the present economic storm blows over to start thinking about devolution.

On the other hand, figures by CIPS suggest that the services sector grew at its fastest rate since March last year in January. The Markit/CIPS purchasing managers’ index rose from 54 to 56 (any figure above 50 suggests growth), suggesting that the impact of austerity might not be as hard as feared. Who’s right? That’s a good question…

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