Increase in risk of a second recession, says think-tank

The chances of the UK economy entering a second recession next year have risen, according to the National Institute for Economic and Social Research (NIESR).

The leading think-tank said that measures introduced in the emergency Budget had increased the risk of a fall in output in 2011 from one in seven to one in five.

Launching the NIESR's quarterly economic report, Ray Barrell, its senior research fellow, said: "The fiscal contraction in the emergency Budget is likely to slow growth by 0.1 per cent this year and 0.4 per cent next year.

"The probability of seeing a contraction of output in 2011 as compared with 2010 has risen from 14 per cent to 19 per cent. The chart in the Office for Budget Responsibility forecast would imply the same rise in probabilities."

The NIESR downgraded its growth forecasts for 2011 from 2 per cent to 1.7 per cent. It also predicted that inflation will stay above 2 per cent into 2012, fuelled largely by the looming VAT increase from 17.5 per cent to 20 per cent.