Consumer spending is unlikely to recover strongly as long as the housing market stays depressed and debt-burdened householders risk losing their jobs.
But next year the economy will grow by 1.7 per cent, and by the fourth quarter inflation will fall to 2.8 per cent. The institute says its forecasts have been cut back but they still suggest that the Government can avoid pressure to leave the ERM.
The biggest concern will be unemployment, rising from 2.9 million at the end of this year to 3 million at the end of next.
The institute also urges the Government to boost demand to speed the end of recession. It wants extra public spending on capital works such as building repairs; deferment of some company taxation; more aid for housing including higher council house spending; and a reduction in National Savings rates, to ease pressures on financial markets.
Measures of this kind would ease the pain of transition to a low-inflation economy with a fixed exchange rate, the institute says.
Gallup, the opinion poll company, said yesterday that consumer confidence had slumped to its lowest level since early 1990, threatening a further fall in high street spending which could push the economy deeper into recession.
Twice as many people believe the economy will deteriorate in the coming year as believe things will get better, according to the latest survey carried out for the European Commission. Last month consumers were evenly split over prospects.
Some 25 per cent of consumers believe their own financial circumstances will improve in the coming year, against 20 per cent who think things will get worse. In July, 23 per cent expected an improvement and 23 per cent expected things to get worse.
The number of consumers believing now is a good time to make major purchases also slipped slightly. But confidence on this measure has remained relatively buoyant because of savage high street price cutting.
One big constraint on consumer spending - and also people's willingness to move house - is fear of job losses. Seven times as many consumers expect unemployment to rise in the coming year as expect it to fall.
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