Britain’s economy to shrink in 2012: NIESR

Britain's economy has entered a mild recession and would shrink in 2012,  says a leading think-tank in a report released today,  calling on the government to boost near-term spending in a bid to prevent long-term damage from higher unemployment.

The National Institute of Economic and Social Research (NIESR) projected a GDP drop of 0.1 per cent this year as the unresolved euro crisis weighed on export prospects and business confidence.

The institute sees the unemployment rate increasing to 9.1 per cent, and has warned that even the expected recovery from 2013 onwards might not suffice to get unemployment back to its pre-crisis level, which would create higher structural unemployment.

Britain was risking "significant long-term economic and social damage" without measures to boost job creation, according to NIESR's director Jonathan Portes, who said the government would have enough room to hike spending in infrastructure projects in the near-term without harming Britain's credibility as a debtor, Portes said.

The institute has long been calling on the government to ease its austerity drive. According to the report, debt-financed investment spending of around £15 billion would reduce the expected unemployment rate by 0.3 percentage points.

"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," the institute said. On Wednesday, fiscal policy think-tank Institute of Fiscal Studies (IFS) said the case for government stimulus had grown, noting however, the risk that spending financed through extra borrowing might hurt market confidence and drive up borrowing costs.