UK will avoid recession in 2016 but ex-Bank deputy warns no ‘big bazooka’ to prevent slowdown

The National Institute of Economic and Social Research (Niesr) expects the economy to contract by 0.2 per cent in the third quarter following the vote to leave the EU, but to grow by 0.1 per cent in the final three months of 2016, reports The Telegraph.

This would see the UK avoid a technical recession – usually defined as two consecutive quarters of economic contraction.

The think-tank said swift action by policymakers could help to prevent a prolonged slowdown as it downgraded its UK growth forecast for 2016 to 1.7 per cent, from a projection of 2 per cent in May.

Economists said there was still an “evens” chance of recession over the next 18 months.

Simon Kirby, head of macroeconomic forecasting at Niesr, said the UK economy had expanded by less than 1pc in just nine years out of the past 50.

“Seven of those were outright contractions, so this is a notable slowdown in the economy,” he said.

Growth is expected to slow to 1pc in 2017, down from a forecast of 2.7 per cent three months ago.

Inflation is forecast to rise to 3 per cent, well above the Bank’s 2 per cent target, while the impact of the Brexit vote is expected to blow a £50bn hole in the public finances, even if the UK stops EU budget payments after it leaves the bloc.

Niesr expects the Bank of England to cut interest rates to a new low of 0.25 per cent tomorrow, from 0.5 per cent. Jack Meaning, a research fellow at Niesr, said he supported a “sledgehammer” approach to boosting the economy.

He said more quantitative easing  and slashing rates close to zero could almost offset the short term shock to the economy by boosting its size by up to 1.5pc over the next two years.

However, Sir Charlie Bean, a former deputy governor of the Bank, warned on Tuesday that the impact of monetary stimulus was likely to be limited.

“The world is very different from where we were during the financial crisis,” he said at an event organised by Fathom Consulting.

“Rates are already at very low levels. The reason we stopped at 0.5pc in early 2009 was because we were concerned that cutting further would be counterproductive –the squeeze on bank margins might in itself reduce the extension of credit .”

Sir Charlie also appeared to criticise policy­makers’ comments that they expected to take action this month.

“It’s one thing for Bank members to say ‘we will do what is neces­sary to meet our man­date and to keep inflation on target’, and another thing to be actually pre-configuring policy action where, if the world doesn’t turn out as you expect it to, you may be left with egg on your face,” he said.