Cebr has also revised down its growth forecast for the country for 2011 to 1.1%, after growth of 1.8% during last year.
However, its report highlighted that the prospects of the world economy falling into a double dip were “highly unlikely”.
Nevertheless, the VAT increase will keep inflation up in 2011, said Cebr, and the UK could witness inflation rise over the next three months to a peak of around 4% before falling sharply to 2.6% in Q4 and just 1.6% by the middle of 2012.
Indeed, it said that there was a strong possibility of monthly inflation approaching the lower limit of the Bank of England’s target range of 1% during 2012.
The report said: “Although we still think additional quantitative easing is likely, it is going to take longer to happen than we previously thought. The Bank of England Monetary Policy Committee will be cautious about its credibility, having underforecast inflation in recent months, and we expect they will wait until there is hard evidence that inflation is falling before taking monetary action.”
Charles Davis, managing economist of the Cebr and report author, said: “Looking forward, this is probably going to be the toughest year in the next economic cycle, with inflation rising initially and growth slowing sharply, with policy makers hamstrung by a loss of credibility.”
Douglas McWilliams, report author and chief executive at Cebr, added: “The good news is that after 2011 we see growth returning, with GDP growth by 2015 of nearly 3%. But with companies cautious about borrowing, banks still wary of lending and household incomes squeezed, it is a tough background for achieving the reductions in public spending that are absolutely necessary to reduce the deficit.”
