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Economy expected to face 'marked slowdown' amid chance of technical recession

Published 03/08/2016

The economy is heading for a marked slowdown, an influential think-tank predicted.
The economy is heading for a marked slowdown, an influential think-tank predicted.

The economy is heading for a marked slowdown with an evens chance of recession over the next 18 months, an influential think-tank predicted.

Growth is expected to hit 1.7% overall this year with a decline of 0.2% in the third quarter and risk of "further deterioration", according to t he National Institute of Economic and Social Research (NIESR).

GDP will slow to 1% in 2017 while inflation is forecast to reach more than 3%, according to its analysis.

Borrowing is expected to increase by an additional £47 billion by 2020/21 and the unemployment rate is expected to rise from 4.8% in the second quarter of this year to around 5.75% in the middle of 2017, the think-tank said.

It comes amid heightened uncertainty and a fall in the pound following Britain's vote to leave the European Union.

NIESR said the shock result is the "main factor" behind its downward revision in the world forecast, from 3.5% to 3.3% in 2017, with the greatest change in the EU where growth is expected to be 0.4% lower.

Britain's future relationship with the bloc is "most likely" to be a trade agreement similar to the Swiss model that would allow free access to goods markets but limited access to services markets, it said.

The think-tank warned that the chances of a recession in Britain have "increased significantly" since its previous forecasts but said it expected any downturn to be temporary, with growth likely to improve from 2018.

Simon Kirby, head of macroeconomic modelling and forecasting at NIESR, said: "We expect the UK to experience a marked economic slowdown in the second half of this year and throughout 2017.

"There is an evens chance of a technical recession in the next 18 months, while there is an elevated risk of further deterioration in the near term. In light of the downturn under way and the downside risks to the outlook, a decision by the MPC to provide monetary stimulus would be welcome and we look forward to assessing the new Chancellor's plans at the autumn statement.

"We expect the rate of inflation to peak at over 3% at the end of 2017, induced mainly by the recent depreciation of sterling. The MPC should look through this temporary rise in inflation and ease monetary policy substantially in the coming months.

"Indeed, the slowdown we are projecting is conditioned on the assumption that the MPC will cut interest rates to just 10 basis points, starting with a 25 basis point cut at their August meeting.

"The effects on the economy from these interest rate reductions are relatively modest, but our analysis suggests that the reduction in combination with a further round of quantitative easing (of around £200 billion) could boost the size of the economy by as much as 1.5% over the next two years."

Shadow chancellor John McDonnell said: "The economic outlook for the UK is uncertain, and it's time the Chancellor stepped up and told us what he is planning to do.

"The Government's woeful lack of planning for the impact of the EU referendum result has only added to the uncertainty employees and employers are feeling today. Many people are understandably anxious - fearing for their jobs and worried about the future of the economy.

"It's imperative that Philip Hammond tells us what he is planning to do about it. We can't afford to be stuck with Osborne's planned cuts to investment until the autumn statement.

"We must rebalance our economy and support our key industries with an industrial strategy that can provide the good secure jobs that we so desperately need.

"Labour have pledged to invest in our economy - with priority investment in those communities that have been economically neglected for years."

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