"There is an evens chance of a ‘technical’ recession in the next 18 months, while there is an elevated risk of further deterioration in the near term."
The Institute says that GDP is likely to decline by 0.2% in the third quarter of this year and there is "a risk of a further deterioration".
It added that the chance of a recession has increased 'significantly' since its previous forecast, and that there is now "an evens chance of a ‘technical’ recession in the next 18 months".
NIESR says that it expects a 25 basis point reduction in Bank Rate at the MPC's August meeting, and a further 15 basis point reduction at the November meeting. It added that this "could well be combined with further quantitative easing", which could offset a negative shock to the economy of up to approximately 1½% of GDP.
Additionally, its forecasts for government borrowing have "changed substantially from those published just three months ago". It now predicts an absolute surplus to be achieved only in 2021–22.
It also believes that an economic downturn will generate a significant increase in the magnitude of borrowing between 2016–17 and 2020–21, "amounting to at least a cumulative £47 billion" (an annual average of £9.5 billion or 0.5% of GDP).
Simon Kirby, Head of Macroeconomic Modelling and Forecasting at NIESR, said: “We expect the UK to experience a marked economic slowdown in the second half of this year and throughout 2017. There is an evens chance of a ‘technical’ recession in the next 18 months, while there is an elevated risk of further deterioration in the near term. In light of the downturn underway and the downside risks to the outlook, a decision by the MPC to provide monetary stimulus would be welcome and we look forward to assessing the new Chancellor’s plans at the Autumn Statement.
“We expect the rate of inflation to peak at over 3% at the end of 2017, induced mainly by the recent depreciation of sterling. The MPC should ‘look through’ this temporary rise in inflation and ease monetary policy substantially in the coming months.
"Indeed, the slowdown we are projecting is conditioned on the assumption that the MPC will cut interest rates to just 10 basis points, starting with a 25 basis point cut at their August meeting. The effects on the economy from these interest rate reductions are relatively modest, but our analysis suggests that the reduction in combination with a further round of quantitative easing (of around £200 billion) could boost the size of the economy by as much as 1½% over the next two years.”
