NIESR: Economic stagnation to continue into 2012

There is a high risk of another recession in the UK over the next year even if European leaders resolve the sovereign debt crisis, a leading economic think-tank warns today.

The National Institute of Economic and Social Research said the economy had "been stagnant for close to a year now, and we expect this to continue into the first half of 2012". It went on to lower its expectation for growth to 0.9 per cent in 2011 and 0.8 per cent in 2012. It had previously expected 1.3 per cent growth in 2011 and 2 per cent in 2012.

But it warned that its expectations "assume a successful resolution of the euro area crisis". "A sharper than expected inventory cycle would result in the UK falling back into recession in 2011-12," it said, putting the chances of this happening at "close to 50 per cent" even if the crisis is dealt with. "If policymakers 'muddle through' the euro area crisis the probability of recession in the UK rises to 70 per cent," it added.

The warning will offset any lingering relief at the news of an unexpected pick up in the construction sector yesterday, with activity in October jumping to 53.9 from 50.1 in September according to the latest Markit/Cips purchasing managers index.

NIESR said UK growth will not return to its pre-recession peak until the end of 2013, with its director, Jonathan Portes, reiterating the need for an easing of the Government's austerity drive. The weakness will also hit the public finances in the near term, although the deterioration will be temporary, it added.