Britain's jobless rate to rise as Osborne's economic strategy fails to halt slide back into recession, says IPPR
The UK economy faces a bleak 2012 and risks tumbling back into recession as a result of confidence-crushing austerity measures and the crisis in the eurozone, a new report warns.
The Institute for Public Policy Research says the only good news for consumers is that inflation will fall and so the squeeze on households' spending power will end – "at least for those who keep their jobs".
The thinktank's chief economist, Tony Dolphin, says during 2011 growth was lower than expected, unemployment higher and public sector borrowing greater. Looking ahead, he sees no obvious way to shore up the economy. "In the short term, economic policy has become a matter of hoping that something turns up – and that is why, for the UK economy, 2012 is unlikely to be a happy new year.
"As we enter 2012, it seems the word that best describes the outlook for the UK economy is 'bleak'. The eurozone crisis is unresolved and country after country is being forced to adopt extreme austerity measures that will result in large falls in output." He highlights the assessments of the Organisation for Economic Co-operation and Development and the UK's Office for Budget Responsibility (OBR) that "the UK economy is teetering on the brink of a return to recession".
"These forecasts all come with the warning that things could get a lot worse in the eurozone, and if they do then the UK would fall into a serious recession," adds Dolphin.
The OECD has warned that Britain will go back into recession this winter because of a fresh increase in unemployment, a squeeze on family budgets, government spending cuts and the eurozone crisis.
The thinktank, which advises more than 30 developed countries, rejects George Osborne's argument that an expanding private sector could soak up public sector job losses and warns that dole queues will lengthen to more than 9% of the working population as growth slows.
The OBR, whose forecasts are used by the Treasury, has a similarly bleak labour market outlook. It sees unemployment rising from 8.3% now to 8.7% in 2012. At the time of the government's autumn statement on the economy, the independent body slashed its growth outlook as well. It now expects growth of just 0.9% this year and an even weaker 0.7% next year, compared with a previous forecast of 2.5%.
It puts the chances of recession in the near term at one in three, while other economists put the likelihood much higher and reckon growth has already ground to a halt or may even have slipped into negative territory.
The IPPR wants the coalition government to temper its austerity drive, which includes hundreds of thousands of public sector job cuts, to take more account of growth. "When growth is strong, tightening can be speeded up, but when growth is weak, as now, then tightening should be slowed down," the thinktank argues.
It also wants specific measures to boost the economy such as bringing forward the creation of a national investment bank.
Dolphin says even talk of austerity could send the UK into a double dip. "Going into 2012, the risk is that talk of austerity at home and crisis in Europe will dampen spirits to such an extent that the economy drifts into recession," he says.
"If the economy does find itself back in recession, it is likely to have to find its own way out of it. There are ultimately only three solutions: the government decides to increase public spending, or overseas demand for UK output increases substantially, or UK households and companies are given some reason to spend more.
"The first is not going to happen, the second is extremely unlikely, and so we left with the third. But with no prospect of tax cuts or lower interest rates, it is not clear what in the short term the catalyst for more spending by the private sector will be."
The IPPR echoes the predictions of Bank of England policymakers that inflation will fall over the coming year, easing pressure on households grappling with soaring prices and minimal wage rises.
Inflation currently stands at 4.8%, more than double the average annual pay growth of 2%. The Bank's monetary policy committee argues, however, that as this year's VAT rise drops out of calculations and commodity prices ease, inflation will come back down towards the government-set 2% target.