- The economy will contract by 0.5 per cent this year, but grow by 1.3 per cent in 2013.
- Consumer price inflation will fall below the 2 per cent target by the end of 2012.
- Unemployment will peak at 8.6 per cent in 2013.
- We expect the cyclically adjusted current budget to be in surplus in 2016–17.
The deterioration in the UK economy has been more pronounced than even we expected. We estimate that the ‘Jubilee effect’ reduced estimated growth in the second quarter by 0.4 percentage point, with a corresponding boost to be expected in the third quarter. This implies that underlying growth is still negative. But focusing on a ‘double dip’ distracts from the more important trend; the level of output has effectively been flat over the past two years. This is largely due to domestic economic factors; private sector adjustment has been exacerbated by fiscal consolidation and a dysfunctional financial system. The divergence between poor growth figures and relatively strong labour market performance remains a puzzle, although other countries, for example Germany, have also experienced very weak productivity growth.
NIESR's forecasts for the UK and world economy are based on our global macroeconomic model, NiGEM (see here for subscription information). Forecasts are published on our quarterly journal, the National Institute Economic Review, available from Sage Publications Ltd (http://ner.sagepub.com./) at email@example.com.