Britain's economy will fall into recession in the first half of the year and the Government needs to ease up on its tough package of spending cuts, an influential think-tank has warned.
The UK economy will shrink 0.1% in 2012 as cash-strapped households tighten their purse-strings and nervous businesses hold back on investment, said the National Institute of Economic and Social Research (Niesr).
Chancellor George Osborne's austerity measures are contributing to low demand in the UK, which in turn is damaging the broader economy, so a temporary softening of his fiscal stance would give the country a much-needed boost, said Niesr.
The think-tank said an increase in Government investment would not derail the Chancellor's long term goals or prevent him hitting his fiscal targets. Elsewhere, it said the UK economy would rebound in 2013 with 2.3% growth - but only if a successful resolution to the ongoing eurozone debt crisis is found.
Meanwhile, the group forecast global growth of 3.5% for 2012, led by Asian powerhouses China and India, while the US should see 2% growth. The UK is already close to another recession - defined as two consecutive quarters of decline - after the economy shrank by 0.2% in the fourth quarter of 2011.
It said unemployment will rise to about 9% this year, from 8.4% in the three months to November and will remain above 7% in 2014. A jobless figure at this elevated level for a long period is likely to do "permanent damage" to the supply side of the economy, with large long-run economic costs, Niesr warned.
The think-tank added: "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 eurozone is also expected to enter a recession as the debt crisis continues, lending conditions remain tight and unemployment is high.
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The Chancellor last month pledged to stick to the coalition Government's austerity programme, which has been attacked for choking off the recovery, after the fourth quarter GDP figures were published. He said: "Britain has substantial debts. If we don't deal with those debts, our problems will be worse."
A Treasury spokesman said: "As Niesr have said today, the Government's commitment to deficit reduction has helped maintain market confidence. They expect the Government to meet its fiscal mandate and for the UK economy to grow more strongly than the euro area this year and next."