The institute said the UK economy would remain weak and it did not expect economic conditions to improve in the near term.
It said: “We expect output to be flat this year as both the private and public sectors continue simultaneous deleveraging.”
As a result NIESR forecasted a return to technical recession in the first half of the year as households continued to retrench, credit conditions remained tight and businesses were reluctant to invest.
The institute assumes a successful resolution of the Euro crisis and therefore it expects growth to pick up in the second half of the year and to accelerate somewhat in 2013.
It also expects the consumer price index measure of inflation to fall back to 2.2% this year, close to the Bank of England’s target 2.0% target.
NIESR however expects inflation to undershoot the target in 2013 and peak at 1.4%.
It said: “The UK economy currently suffers from deficient demand; the current stance of fiscal policy is contributing to this deficiency. A temporary easing of fiscal policy in the near term would boost the economy.
“The credible commitment to a sustainable fiscal policy over the longer term provides the government with the flexibility to provide a clearly defined and temporary boost to near-term demand.
“An increase in government investment would not have a significant impact either on long-run sustainability or – given the way they are defined – the likelihood of the government meeting its fiscal targets.”
