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UK set for even slower growth, warns NIESR

Economic growth will be weaker than expected this year and incomes per head will fall more sharply, a respected think tank forecast today as Bank of England policymakers meet to decide interest rates.

The National Institute of Economic and Social Research (NIESR) downgraded its forecast for growth in 2011 to 1.4 per cent from 1.5 per cent and predicted that real disposable income will fall by £301 per person.

NIESR's downbeat assessment follows yesterday's surprise announcement of a fall in house prices along with weak bank lending figures. Along with slowing manufacturing growth and figures showing the economy barely grew in the first quarter, the outlook for the economy is almost universally gloomy.

The recent slew of bad news has virtually ruled out an increase in rates from the current record low of 0.5 per cent – a move the market believed was a near certainty earlier this year.

The MPC is trying to balance the need to support the weak economy as austerity measures kick in with prices rising at double the Bank's 2 per cent target rate.

House prices unexpectedly fell in April after two months of strong growth, Nationwide said yesterday. The 0.2 per cent drop means property prices are now 1.3 per cent lower than a year ago.

Nationwide said the market was "fairly static" and that there was no reason to think prices would fall more steeply in coming months.

But NIESR predicted a 4.5 per cent drop in house prices in real terms this year, with further falls averaging 1.5 per cent for the following five years.

NIESR predicted growth will pick up to 2 per cent in 2012 but will only outstrip its trend rate of 2.1 per cent by 2013. Until then, the economy will not truly be in recovery, it said.

Growth will be constrained by the Government's spending cuts and the squeeze on household incomes from higher taxes and inflation.

NIESR increased its forecast for consumer price inflation this year to 4.5 per cent from its January prediction of 3.8 per cent, based mainly on the rising cost of oil. As a result, real disposable incomes will fall by 1.9 per cent, or £301, per head.

Simon Kirby, an economist at NIESR, said: "It is going to feel particularly tough this year and much tougher than last year or the year before. People started feeling the pinch from April when higher national insurance hit their wage packets ."

There were further indications of a weak economy yesterday. Activity in the construction industry slowed more quickly than expected last month, an industry survey showed. The Markit/Cips construction purchasing managers' index (PMI) fell to 53.3 in April from 56.4 in March after the first fall in house building this year. The sharp fall in construction growth followed a bigger than expected fall in manufacturing output in an equivalent survey on Tuesday. Both surveys showed continuing growth but the slowdown is worrying as austerity measures begin to bite.

Sterling hit a 13-month low against the euro after the construction data.

Consumer borrowing weakened as households reined in their finances ahead of tougher times ahead. Bank of England figures showed consumer credit rose by £0.1bn compared with the monthly average of £0.3bn over the past six months.

Howard Archer, the chief UK economist at IHS Global Insight, said: "Consumer desire to get a tighter grip on their finances is a reflection of current very low and falling consumer confidence and is the consequence of an uncertain and somewhat worrying longer-term outlook for the economy and jobs as the major fiscal squeeze increasingly kicks in."