If policymakers “muddle through” the crisis the probability of recession increases to 70%. Because the risk of Greece defaulting doesn’t go away but is merely postponed.
The research institute says the economy would not return to its pre-recession peak until the end of 2013, the slowest recovery since the end of the First World War.
NIESR expects the UK economy to grow by 0.9% this year and 0.8% in 2012. Unemployment is expected to rise to 8.9% by the end of 2012 .
With oil and commodity prices having already fallen and little domestically generated pressure on earnings and prices, consumer price inflation is expected to fall back sharply in the course of the next year.
NIESR’s projections show the budget deficit to be at 6.7% of GDP in 2012-13 but it believes the deterioration to be primarily cyclical and hence temporary.
The study said: “In these circumstances, the Bank of England’s decision to undertake another round of quantitative easing is appropriate. However, this will not address the fundamental drag on business investment: uncertainty with regards to future aggregate demand.
“Indeed, it remains our view that in the short term fiscal policy is too tight and a modest loosening would improve prospects for output and employment with little or no negative effect on fiscal credibility.
“The case for this approach has clearly been strengthened by recent developments, both domestically and internationally.”
