The sustained high levels of unemployment expected over the next three years are likely to do permanent damage to UK industry and will cost the economy dearly into the long-term, a think tank has warned.
The National Institute of Economic and Social Research predicted that unemployment would hit about 9% this year and, even by 2104, would still stand at more than 7% – some 1.75% higher than the structural unemployment rates estimated by the Office for Budget Responsibility.
But the organisation warned: "Unemployment at this elevated level for such a long period is likely to do permanent damage to the supply side of the economy, with large long-run economic costs."
It also forecast that the UK economy would enter recession in the first half of the year as consumers continued to cut back, which meant that the government should put a brake on the speed in which it pushed through its austerity measures.
"We forecast a return to technical recession in the first half of this year, as households continue to retrench, credit conditions remain tight, and businesses are reluctant to invest given uncertainty about both domestic and foreign demand,” it noted. "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.”
UK GDP is expected to shrink by 0.1% in 2012, which would mean that the economy was in a technical recession (two quarters of negative figures), not least because organisations in both the private andpublic sectors were still focused on paying off debts.
But the Institute added that the economy was likely to start bouncing back next year, growing at 2.3% in 2013 – if the eurozone debt crisis is resolved.
