NIESR report that the UK economy remains weak, and over the near term they do not expect economic conditions to improve. They expect output to be flat this year, as both the private and public sectors continue simultaneous deleveraging.  Meanwhile, while net trade provided the only significant positive contribution to growth in 2011, the Euro Area, the UK’s largest trading partner, is likely to enter recession.

They forecast a return to technical recession in the first half of this year, as households continue to retrench, credit conditions remain tight, and businesses are reluctant to invest given uncertainty about both domestic and foreign demand.  Assuming a successful resolution of the euro crisis, they expect growth to pick up in the second half of the year, and to accelerate somewhat in 2013.

However, the output gap will be closed only very slowly, with unemployment rising to about 9% this year and remaining high throughout the forecast period.  Even in 2014, it will still be over 7%, compared to the OBR’s estimate that the structural unemployment rate is about 5.25%. Unemployment at this elevated level for such a long period is likely to do permanent damage to the supply side of the economy, with large long-run economic costs.   Their central forecast is that inflation will fall below the 2% target in the second half of this year.

The UK economy currently suffers from deficient demand; the current stance of fiscal policy is contributing to this deficiency. A temporary easing of fiscal policy in the near term would boost the economy.  The credible commitment to a sustainable fiscal policy over the longer term provides the Government with the flexibility to provide a clearly defined and temporary boost to near-term demand. An increase in government investment would not have a significant impact either on long-run sustainability or – given the way they are defined – the likelihood of the Government meeting its fiscal targets.