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Britain 'risks return to recession'

Britain's economy is facing a "bleak" new year, with a real risk of return to recession during 2012, a centre-left thinktank has warned.

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 in a new year message.

"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 by bringing forward the establishment of a National Investment bank and have it up and running by the end of 2012.

Former chancellor Alistair Darling said the possibility of a fresh banking crisis is "still very much there". He told BBC Radio 4: "Going back to 2008-2009 the world did come together to avert what could have been an awful meltdown at that time. The current generation of those in power seem to have forgotten the lessons of just three or four years ago."

Mr Darling said 2008 was "very much about trying to stop a catastrophe in the banking system" and the world economy had not been fixed. He added: "I just see the situation getting worse and worse unless countries recognise that unless you get growth going again you are never going to get your borrowing down and therefore you won't get your debt down. That is why I regard the situation as we are going into 2012 as being far, far more serious in many ways than the problems we faced in 2008."

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