Ahead of the new year, IPPR’s Chief Economist says the outlook for the UK economy in 2012 appears “bleak”. He argues that “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 that the only good news for consumers is that inflation is set to fall and if pay rises stay at their current rate, “the squeeze on households’ spending power will end – at least for those who keep their jobs”. There are calling for the Government to do more to boost the economy including bringing forward the establishment of a National Investment bank and have it up and running by the end of 2012. IPPR Chief Economist, Tony Dolphin, said: “Growth in 2011 was lower than expected, unemployment higher and public sector borrowing also greater. The only good news is that the current account deficit is likely to be smaller than forecast, though because this is the result of weak import growth, which is in turn due to the weakness of the economy, it is hardly a cause for celebration.

“As we enter 2012, it seems the word that best describes the outlook for the UK economy is ‘bleak’. The euro zone crisis is unresolved and country after country is being forced to adopt extreme austerity measures that will result in large falls in output. As a result, the whole euro zone economy is believed to be back in (a mild) recession. The effect that this will have on the UK economy explains, in part, why the latest forecasts from bodies such as the OECD and the Office for Budget Responsibility also show the UK economy teetering on the brink of a return to recession. And these forecasts all come with the warning that things could get a lot worse in the euro zone, and if they do then the UK would fall into a serious recession.

“Traditional economics sees fluctuations in the economy as resulting from external shocks and structural factors that prevent markets returning quickly to equilibrium. In the real world, these fluctuations are generated within the economy itself as governments, companies and people interact and try to deal with uncertain futures. 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.

“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: either 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 only good news is that a weaker global economy has led to lower global inflation pressures. Forecasters, including the Bank of England, think inflation will be close to its target rate of 2 per cent by the end of 2012 and, while their track record in recent years has not been good, there is nothing in the latest data to suggest an alternative outcome is more likely. Even if wage inflation only stays at its current level – around 2 to 2½ per cent – the squeeze on households’ spending power will end – at least for those who keep their jobs.

“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.”
IPPR’s ten ideas to boost growth

Make the pace of fiscal tightening responsive to growth in the economy: When growth is strong, tightening can be speeded up but when growth is weak, as now, then tightening should be slowed down.

Guarantee the long-term unemployed a job at the minimum wage: The Government should introduce a job guarantee scheme for anyone who has been out of work for more than 12 consecutive months, matched by an obligation to take up the offer.

Introduce tax reforms to promote private sector growth and employment creation: The Chancellor should introduce capital allowances for future spending on infrastructure projects and extend the R&D tax credit to all non-profitable companies. He should also reverse his plans to cut capital allowance rates.

Boost infrastructure spending, to £10 billion in 2012/13
Establish a National Investment Bank: The Treasury should have a National Investment Bank operational by the end of 2012.

Create sector-specific ‘innovation zones’: The Government should create ‘innovation zones’ that would offer greater government support for R&D and start-ups in key, high value-added sectors. Within the zones, businesses, private stakeholders, researchers, local community groups and councils would work together to identify barriers to growth and to break them down.

Expand the Export Credit Guarantee Scheme: The Government should expand the Export Credit Guarantee Scheme. Efforts should focus in particular on encouraging small and medium-sized businesses across a range of industries to make use of the scheme. The ECGD’s mandate should be broadened to include advising businesses on the credit-worthiness of overseas buyers and assisting exporters to recover bad debts.
Ensure industries can recruit the skilled workers they need to expand and to lift productivity levels: The Growth and Innovation Fund should take centre-stage in the Government’s skills policy. A much expanded fund – £200 million a year – should be backed up by an ambitious programme of research, pilot projects and learning networks to inspire innovative ideas and practice across the economy.

Extend free childcare to make it easier for parents to return to work: IPPR analysis shows that free childcare pays for itself. The Government should take steps towards a system of universal childcare to increase maternal employment rates.

Back universities’ attempts to attract overseas students and businesses’ need for skilled migrants: The Government should reverse its clampdown on students and skilled migrants from outside the EU. The economy cannot be ‘open for business’ but closed to those who want to study and do business here.

IPPR’s research shows that the recovery from the recent recession is the slowest on record.