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UK Economy Forecast 'To Shrink 0.5%' In 2012

(c) Sky News 2012

Britain's GDP will shrink by 0.5% in 2012, a leading think tank has forecast.

The prediction by the National Institute of Economic and Social Research (Niesr) was down sharply from its zero growth forecast in May. It is one of the gloomiest assessments of the state of the economy so far.

It also downgraded its forecast for UK growth in 2013 from 2% to 1.3% and said the effects of the Jubilee reduced growth this spring by 0.4%.

Official figures published last month showed the economy contracted by 0.7% in the second quarter of 2012 alone.

The deterioration in the UK's economy this year has been "more pronounced than even we expected", said the think tank, which also said Chancellor George Osborne has "scope for a less aggressive path of fiscal tightening" and should consider stepping up investment in key projects to boost growth.

The report said the Government's decision to implement austerity immediately after it came to power may have cost the country a total of 16.5% in GDP growth over a decade.

"The scenarios suggest that the recession in 2012 could have been avoided had fiscal tightening measures been delayed," the report said.

"The concern today is that the Great Recession starting in 2008 and the consequent early fiscal tightening policies may lead to significant losses in output and a protracted period of high unemployment."

The report forecast world growth slowing to 3.3% this year and 3.7% in 2013, with unemployment in some countries rising to levels higher than those of the Great Depression of the 1930s.

Niesr predicted that "tensions will heighten further" in the eurozone as Germany enjoys above-trend growth, while southern Europe (Chicago Options: ^REURUSD - news) remains "in deep recession".

While the report predicted the euro will survive, it forecast that Italy and Spain would need support and warned "the prevarication of the past four years can no longer continue".

It also warned that the US is likely to fall back into recession unless the current stand-off between the White House and Congress over budget cuts is resolved.