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‘Evens’ chance of UK entering recession by end of 2017

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03/08/2016
There is a 50/50 chance the UK could enter a technical recession by the end of 2017, the National Institute for Economic and Social Research (NIESR) has warned.

In the think tank’s latest global economic forecast, it estimated the world economy is likely to grow by 3% this year, unchanged from its previous forecast published in May.

However, it has downgraded its expectations for world growth in 2017 to 3.3% from 3.5%, with the largest revision being made for the EU, where its growth predictions have been restricted by 0.4%.

UK Gross Domestic Product (GDP) is expected to grow by 1.7% this year according to NIESR, but will deteriorate to just 1% in 2017.

The UK’s decision to leave the EU is the main reason behind this lowering of expectations, NIESR said, with the UK likely to have limited access to services markets as a result of the referendum outcome, leading to greater fragmentation of EU wholesale finance.

Speaking at a press conference, NIESR’s director Jagjit Chadha, said: “The fundamental point is that leaving an area of near-perfect factor mobility such as the EU is likely to have a negative long run impact on the economy.

“The exact magnitude of the impact depends upon the precise nature of the trading relationships adopted, the quality of the alternatives on offer and whether the countries that remain in the EU seek to change the structure of their internal trade.”

Chadha explained that the institute’s current forecast was based on the dwindling value of the pound and reflective of “endemic” levels of uncertainty faced by the economy.

“Obviously these levels of uncertainty may recede but if they do not the probability of a technical recession by the end of 2017 is at around evens,” he added.

NIESR also expects a significant increase in inflation, currently at 0.5%, to hit a high of just over 3% at the end of next year.

Simon Kirby, head of macroeconomic modelling and forecasting, said that its projection was based on the assumption that the Bank of England’s Monetary Policy Committee will slash interest rates to just 10 basis points, starting with a 0.25% cut tomorrow.

“The MPC should ‘look through’ this temporary rise in inflation and ease monetary policy substantially in the coming months,” he said.

“The effects on the economy from these interest rate reductions are relatively modest, but our analysis suggests that the reduction in combination with a further round of quantitative easing (of around £200 billion) could boost the size of the economy by as much as 1½ per cent over the next two years.”

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