The think tank forecast that the economy will contract by 0.1% over 2012, but see growth pick up in the second half of the year and reach 2.3% in 2013 – dependent on the resolution of the eurozone crisis.
The UK needs one more quarter of negative growth to hit recession, having seen the economy drop 0.2% in Q4 2011.
“We forecast a return to technical recession in the first half of this year, as households continue to retrench, credit conditions remain tight, and businesses are reluctant to invest given uncertainty about both domestic and foreign demand,” NIESR said.
In addition, the NIESR warned that unemployment will continue to rise this year to around 9%, up from 8.4% in the three months to November 2011, and still be more than 7% in 2014.
It said: “Unemployment at this elevated level for such a long period is likely to do permanent damage to the supply side of the economy, with large long-run economic costs.”
Inflation will improve, however, dropping to 2.2% across 2012 and 1.4% in 2013, with inflation falling below the Bank of England’s 2% target in the second half of this year.
NIESR added that the government should consider relaxing its austerity measures in the near term: “The UK economy currently suffers from deficient demand; the current stance of fiscal policy is contributing to this deficiency.
“A temporary easing of fiscal policy in the near term would boost the economy. The credible commitment to a sustainable fiscal policy over the longer term provides the government with the flexibility to provide a clearly defined and temporary boost to near-term demand.
“An increase in government investment would not have a significant impact either on long-run sustainability or – given the way they are defined – the likelihood of the Government meeting its fiscal targets.”
