David Milliken

LONDON, (Reuters) – Britain faces a major hit from rising prices and is in danger of entering a technical recession by the end of 2012.

National Institute of Economic and Social Research forecasts that gross domestic product (GDP) will decline by 0.2% and 0.4% over the next three quarters of 2018.

It would mean that there were two consecutive quarters in contraction. This is a common definition of recession.

Stephen Millard, former Bank of England economist and deputy director of macroeconomics at NIESR, said that the UK economy is facing difficult times.

NIESR claimed that the downturn will not be considered a recession according to its preferred definition of the term – the same as the United States National Bureau of Economic Research’s definition. The latter requires a longer-lasting contraction.

Last week, the Bank of England projected that Britain’s economy could shrink up to 1% by the end of this year. The overall trend is also downward for 2023. But it was not predicted that Britain would see a decline in two consecutive quarters.

NIESR projects that Russia’s invasion in Ukraine will result in a 1.1% reduction or $1.5 trillion in world economic output for this year. This is roughly equivalent to an economy as large as Australia.

NIESR reduced its UK growth projections for 2022 from 4.8% to 3.5% and downgraded 2023 to 0.8% form 1.3%. However, this forecast is better than that of the BoE which predicted a contraction of 0.25% in 2023.

NIESR did not forecast that consumer price inflation would peak at 8.3%. This was lower than the BoE’s prediction of over 10%. NIESR doesn’t expect energy prices rising as fast as the BoE. Inflation will be impacted more by falling output and higher unemployment, according to NIESR.

It stated that the government must increase Universal Credit, its primary welfare benefit for unemployed workers and the low-paid, by 25 Pounds ($31 per week) to offset rising bills and provide a 250-pound grant for the 40% most in need.

Rishi Sunak (Finance minister) scrapped an October temporary COVID-related 20-pound increase in universal credit.

NIESR’s proposal would be 4.2 billion Pounds, which is compared to the 20 Billion Pounds Sunak enjoys in headroom due to his fiscal rules.

Sunak stated two weeks ago that it was foolish to provide more assistance now. He wants to hold off until the end of the year, when the outlook for the economy will be better.

Boris Johnson, Prime Minister of the United Kingdom, told Parliament on Tuesday that more information would be forthcoming on the cost-of-living support.

NIESR calculated that around 1.5million British households (or about 5%) would soon find themselves with food and energy bills which will exceed their disposable income.

Jagjit Chadha, director of NIESR said that the impact on these households can be easily reduced without any deterioration to our medium-term sustainability.

($1 = 0.8114 pounds)