The UK economy is already in recession, says the Centre for Economics and Business Research.
The think tank is predicting negative GDP growth for both Q4 2011 and Q1 2012, which would put the economy officially back into recession.
It has also revised down its GDP forecast for 2012 as a whole from growth of 0.7% to a decline of 0.4%, and warns there is a risk of a more serious decline of 1.1% if events in the eurozone are especially negative.
Looking to the medium term, CEBR says growth will be slow; it is forecasting growth of 0.9% in 2013 and around 1% from 2014 onwards.
Inflation is predicted to fall to 1.7% by Q4 2012 and remain around 2% thereafter.
Unemployment is forecast to rise sharply to three million in 18 months’ time as firms revise their medium-term labour requirements, while the base rate is expected to remain at 0.5% until 2016.
Furthermore, quantitative easing is predicted to increase to a total of £400bn for 2012, with the possibility of more in future years.
Douglas McWilliams, chief executive of CEBR, says: “We take no pleasure in outlining such a bleak forecast. But the world is going through a fundamental change where previously poor economies are industrialising fast.
“This is good news for them, but because of the limits imposed by shortages of energy, minerals and food, some of their growth is at our expense.”
He adds: “The chancellor will not reduce the deficit as quickly as he thinks since tax revenues will be depressed by slow growth.
“But this does not make the case for giving up on austerity. Indeed our forecast, which shows that the UK debt to GDP ratio will go above 90%, means that he will at the minimum have to keep the austerity programme going for much longer than he originally thought.”
Scott Corfe, senior economist at CEBR and main author of the report, adds: “We see a weak outlook for sterling. But of course the euro and the dollar are also likely to be weak, so the main weakening is likely to be against the Asian currencies and the commodity based currencies.”