Economy at risk of return to negative growth

The outlook for the UK economy has deteriorated over the last three months and the risk of negative growth has increased, says leading think tank NIESR.

'There is a risk the economy will fall back into negative growth this year and next year,' said Simon Kirby, research fellow at the National Institute for Economic and Social Research.

He said the emergency budget has raised the probability of a decline in output in 2011 to 19% from his earlier forecast of a 14% probability. That reflects the impact of the more far-reaching – but necessary – cutbacks announced by the new government, he said.

The economic forecasting group, which advises many of the world's central banks, is now expecting the UK economy to grow just 1.3% this year, up from its 1% growth forecast back in the spring.

It is expecting the UK to grow just 0.1% in the third quarter and 0.3% in the fourth quarter.

It has cut its 2011 forecast and now sees growth next year at 1.7% and at 2.2% in 2012 which is below the most recent forecast from the newly established Office for Budget Responsibilty of 2.3% and 2.8%.

The graph from NIESR shows how in previous downturns the road out of recovery has often been bumpy.

The forecasts seem pessimistic after the much stronger than expected 1.1% growth in the second quarter  but Kirby said that reflects the planned cuts in government spending.

'We see quite weak growth in the second half as fiscal consolidation is starting in the second half of the year,' he said.

He said government spending had made a positive contribution to the much stronger than expected growth in the three months to the end of June.

And he said even his meagre growth forecasts are based on an assumption that the weak pound will begin to feed through to higher exports.