Fragile Economy Will `Crawl' at Lower-Than-Forecast Growth, Institute Says

The U.K. economy will “crawl” this year and expand less than previously forecast as consumer spending remains weak, the National Institute of Economic and Social Research said.

Gross domestic product will increase 1 percent in 2010, the London-based research group, whose clients include the Bank of England and the Treasury, said today in a quarterly report. Niesr estimated expansion of 1.1 percent in January.

With an election on May 6, Prime Minister Gordon Brown is trying to persuade voters he is best placed to steer the economic recovery after slowing growth intensified political squabbling on how to cut the country’s record deficit. The British economy remains in a “fragile state,” former Bank of England policy maker Timothy Besley said on April 27.

“The economy will crawl this year,” Niesr economist Simon Kirby told reporters at the release of the report in London. “We’re expecting growth to continue over the next couple of years, but this growth is weak.”

Niesr left its forecasts for GDP growth of 2 percent in 2011 and 2.2 percent in 2012 unchanged. Plans announced so far by the government to consolidate its finances will see public spending reducing annual GDP growth by about 0.75 percentage point in each of those years, Kirby said.

The next government needs to deepen measures to reduce the budget deficit, to create more leeway for future financial crises, on top of current plans to cut the shortfall in half in the next five years, Niesr said. An extra program worth 2 percent of GDP or about 30 billion pounds ($46 billion), split between tax increases and spending cuts, should be enacted once a sustained economic recovery is under way, the group said.

Inflation will average 3.1 percent this year and fall below the Bank of England’s 2 percent target in 2011 and 2012 on the assumption that the bank starts a “very modest and gradual rise” in interest rates by the end of this year, Kirby said.

To contact the reporter on this story: Scott Hamilton in London at shamilton8@bloomberg.net.

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