Stark warning of second recession in UK next year

George Osborne's emergency Budget has increased the chances of the British economy experiencing a second recession next year.

The country's longest-established economic think tank, the National Institute for Economic and Social Research, says today that the chances of output falling next year have risen from about one in seven to a fifth, as result of the tough measures the Chancellor announced on 22 June.

And the probability of two successive quarters of negative growth in 2011 – the technical definition of a recession – is now running at slightly more than a fifth, uncomfortably high for ministers anxious to show that cuts in public spending will "crowd in" private sector investment and job creation.

The NIESR adds that living standards will not return to pre-crisis levels before 2015, and that house prices, allowing for inflation, will decline over the course of this Parliament.

The Institute's director of macroeconomic research and forecasting, Ray Barrel, comments: "The fiscal contraction in the emergency Budget is likely to slow growth by 0.1 per cent this year and 0.4 per cent next year.

"The probability of seeing a contraction of output in 2011 as compared to 2010 has risen from 14 per cent to 19 per cent. The chart in the Office for Budget Responsibility Budget Forecast would imply the same rise in probabilities."

However, the OBR chose not to include in its growth predictions the possibility of a second recession. Such an apparent sensitivity to political concerns will add to existing doubts about the OBR's independence and integrity.

Even if a technical recession is avoided, growth will in any case be minimal. The NIESR's forecast has been chopped by 0.4 per cent to 1.7 per cent. It follows a similar reduction in the IMF's forecasts of UK growth, though the Fund remains more optimistic, at 2.1 per cent. In 2012, the NIESR forecast that growth will be a more healthy 2.2 per cent. Growth this year will be 1.3 per cent.

Despite a rapid expansion in GDP of 1.1 per cent in the second quarter, recorded by the Office for National Statistics last week, the NIESR argues that: "Economic growth this year has so far been supported by government current and capital spending and a slowing pace of destocking. Disappointing net trade figures from the first quarter of this year mean that net trade is a drag on GDP growth for the year as whole.

"Per capita consumer spending will not recover its pre-recession peak until 2015. Growth will be more dependent on the contribution of trade, while public spending will pose a drag on growth for longer than had previously been expected. Public sector spending cuts will subtract from economic growth in every year from 2011 to 2015."

However the Institute did offer the Chancellor some cautious praise: "It is more likely than not that the Chancellor's Fiscal Mandate will be met. But considerable risks to the outlook remain and the Chancellor will need to keep a watchful eye on the public finances. He has some headroom before any action would need to be taken."

Global growth is forecast be 1.2 per cent in first quarter of 2010, or at an annualised rate of 4.8 per cent, driven by Asia and a faster than anticipated revival in trade.

No rest for a select few...

The Treasury Select Committee meets the Governor of the Bank of England, Mervyn King, and senior colleagues today for a two-hour session – on the first day of the parliamentary recess. With its report on the Budget already published and a myriad of new initatives, including a new one on bank competition, the Committtee is enjoying an unusually busy time.

Mr King will face a grilling from the cross-party committee on the Bank's latest Inflation Report and its plans for so-called "macroprudential regulation" and the new Financial Stability Committee.

The Bank's Chief Economist,Spencer Dale, told The Independent last week that inflation was likely to be above 2 per cent for the whole of 2011, thanks in part to the hike in VAT from January. On financial regulation, this will be the first opportunity for the new Committee and its chairman, Andrew Tyrie, to explore the proposed methods for preventing systemic risk and credit bubbles. Many, not least the previous Treasury Committee, criticised the old "tripartite" system for diluting responsibility between the Treasury, the Bank and the Financial Services Authority during the crisis.