U.K. Economy Faces Risk of Prolonged Stagnation: NIESR

Britain’s economy will grow more slowly this year than previously forecast and stagnation may persist, according to the National Institute of Economic and Social Research.

The institute sees the economy expanding 0.7 percent this year instead of the 1.1 percent forecast in November, and 1.5 percent in 2014, it said in a report published in London today. It also said Chancellor of the Exchequer George Osborne should relax his fiscal squeeze to help the recovery.

The economy shrank 0.3 percent in the fourth quarter and is facing the threat of a triple-dip recession. With gross domestic product more than 3 percent below its 2008 peak, NIESR said the U.K. is in the slowest post-recession recovery in 100 years and it doesn’t expect GDP to regain its previous peak until 2015.

“The concern should not be whether or not the economy shrank slightly at the start of 2013 to fulfill the ‘technical’ definition of recession, or whether there is slight growth,” NIESR said. It should be on “the broader question of whether stagnation persists throughout 2013.”

The institute also forecast that net debt will peak at about 85 percent of GDP in the 2016–2017 fiscal year. That compares with the Office for Budget Responsibility’s projection in December that debt will reach its highest point in 2015-2016 at about 80 percent and then start to decline.

‘Looser Policy’

After the economy stagnated in 2012, the institute said a balanced recovery depends upon a resumption of consumer spending, corporate investment and a pickup in exports.

“Such a recovery would best be supported by a significant increase in public-sector net investment, with looser fiscal policy in the short term while demand remains weak,” it said. “At the same time, a new and credible fiscal framework should underpin a continued commitment to fiscal consolidation over the medium to long term.”

As the Bank of England’s Monetary Policy Committee begins its two-day meeting tomorrow, NIESR economist Simon Kirby said it will leave its bond-buying stimulus program on hold as “MPC members have been highlighting concerns about the effectiveness of asset purchases.”

All 43 economists in a Bloomberg News survey also forecast that the MPC will leave the target for QE at 375 billion pounds ($590 billion). The central bank will announce the decision at noon on Feb. 7.

Separately today, the British Retail Consortium said retail sales rose 1.9 percent in January from a year earlier on a like-for-like basis. Total sales increased 3 percent. The BRC said the figures may indicate that ``the mood is lifting a little for customers and retailers'' after a subdued Christmas.

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