There is an “evens” chance of the UK slipping into a recession by the end of next year, according to a think-tank.
The National Institute for Economic and Social Research predicted the British economy will decline by 0.2 per cent between July and September this year and warned of the risk of further deterioration.
It predicted UK GDP to grow by 1.7 per cent in 2016, slowing to just 1 per cent in 2017.
Simon Kirby, head of macroeconomic modelling and forecasting at NIESR, said he expects 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.”
When it comes to government borrowing, the think-tank’s forecasts have changed considerably from those published just three months ago.
Mr Kirby also expected the Bank of England to cut the base rate down to 0.1 per cent, starting with a 25 basis point reduction when the Monetary Policy Committee meet later this month, and then a further 15 basis point reduction in November.
While he said these interest rate reductions would only have a “modest” effect on the economy, he suggested a further round of quantitative easing – injecting around £200bn – could boost the size of the economy by as much as 1.5 per cent over the next two years.
“We expect the rate of inflation to peak at over three per cent 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.”
The think-tank also predicted government debt as a percentage of GDP to increase to just over 90 per cent by the end of next year, from 89 per cent at the end of 2015.
katherine.denham@ft.com
