Britain stands on the threshold of a "double-dip" recession and the Government should be prepared to make changes to its deficit reduction plans in order to support the economy, according to the influential Organisation for Economic Co-operation and Development (OECD).
The latest report from the Paris-based think tank – which will come as a blow to the Chancellor George Osborne on the eve of his Autumn Statement – projects that the British economy will contract in the final quarter of this year by 0.025 per cent, before registering a further shrinkage of 0.15 per cent in the first three months of 2012. This would fit the technical definition of a recession, which is two successive quarters of economic contraction, although it would be a mild downturn compared with the slump of 2008-09, which saw UK output fall by 7.1 per cent.
The OECD was previously highly supportive of Mr Osborne's ambitious fiscal consolidation strategy, but now it also believes that the Chancellor needs to change his strategy to adapt should the economy deteriorate still further.
Slowing down the Government's programme of cuts would be warranted under such circumstances, the OECD said. It added, though, that any slackening of the pace of spending cuts in the short-term should be offset by an announcement by the Chancellor of greater fiscal tightening to be implemented when the economy improves.
The UK economy will grow by just 0.5 per cent in 2012, down from 1.8 per cent projected by the OECD in May, the think tank said. Growth projections from other forecasters have been tumbling in recent months too, and the Government's Office for Budget Responsibility (OBR) is expected to downgrade its own forecasts drastically today. In March, the OBR said that growth would grow by a comparatively sunny 2.5 per cent next year.
The OECD's latest bleak projections are based on the assumption that the Bank of England will increase its monetary stimulus in the coming months. It expects the Bank to increase its Quantitative Easing (injecting money) programme from £275 billion to £400bn next year. This would mean the central bank buying up 40 per cent of the outstanding stock of government bonds.
The OECD blames the collapse in UK growth on a combination of cuts in government spending, households paying off debt and the turbulence created by a weakening global economy. It identified "rising uncertainty" resulting from the eurozone debt crisis as a strong source of economic headwinds. In a further depressing forecast, the think tank said it expects the UK unemployment rate to rise to 8.8 per cent in 2012 and to hit 9.1 per cent in 2013, which will mean a sharp rise in unemployment benefit payments. Rising benefit payments and falls in tax revenues mean that gross UK government debt will hit 100 per cent of GDP by 2013.
Growth in the eurozone, however, is forecast by the OECD to be even weaker than in Britain next year. It expects an expansion of just 0.2 per cent across the single currency area in 2012, with France, Germany and Italy all experiencing larger contractions than the UK over the coming six months.
PM's growth strategy: Cameron's week of photo opportunities
Nothing like a well-judged photo op...
Always on the lookout for a telegenic backdrop to launch his latest initiative, David Cameron has been popping up all over the country, hailing initiative after initiative that will "get Britain growing again".
It started last Monday, when he travelled to Guildford to announce the new strategy to boost house building.
On Thursday he was in Derbyshire to announce a "massive vote of confidence for UK manufacturing" with 1,500 new jobs at Toyota. That same day he visited Nestlé to announce "brilliant news" after 300 jobs were created. The next day saw a trip to Lotus in Oxford to hail the British Formula One industry as a world leader in engineering.
He was at it again yesterday, visiting a Northern Rail depot in Manchester, promising that: "If we make our trains faster, we will make our economy grow faster."
Broadcasters and photographers will be relieved that, at least today, Mr Cameron will be in London to hear what will be less good news about the economy. Oliver Wright
The blame game: Osborne's potential scapegoats
So who will George Osborne blame today for forcing him to do his sums again?
We've heard it before and we'll here it again: "Labour got us into this mess and we're getting out of it." The trouble is the longer the Coalition are in power the less resonance it has.
The new (or some might say old) bogymen for Britain's faltering growth. The problem for Osborne is that our current economic woes started well before the latest crisis in Italy, Greece and Spain.
Despite his Atlanticist credentials, expect lots from Osborne about how we live in a global economy – a subtle swipe at the failure of the Americans to stimulate jobs and growth.
Cameron has already described them as the "enemies of enterprise" and as scapegoats they have one important advantage: they can't fight back.
The Royal Family
Despite being a Royalist, the bank holiday to celebrate Kate and William's wedding is also on the list of factors that have set us back over the last year.
Not even the Almighty will get off scot-free. The act of God caused by the Japanese tsunami is high up the list of excuses on why things are going wrong.