Double-Dip Recession 'Too Close To Call'

The UK will return to recession in the first half of this year, one influential think-tank has warned, but other new data from the services industry suggests otherwise.

The National Institute of Economic and Social Research (NIESR) has predicted a GDP drop of 0.1% in 2012. It blames the Government's fiscal squeeze, households cutting back on spending, tight credit conditions and uncertainty in the eurozone.

It is the latest in a series warnings that another recession is looming.But a new puchasing managers' index from Markit and the Chartered Institute for Purchasing and Supply, also published on Friday, suggests the UK economy may not go back into a recession after all.

It found Britain's service industries - from nail parlours and restaurants to transport and IT- are expanding at their fastest rate for 10 months.

The report shows overall activity and employment at their strongest since last March, new business growth at its fastest since July, and expectations for the future the highest since May.

Markit chief economist Chris Williamson said: "The surprisingly strong upturn in the service sector follows a similar improvement in manufacturing and ongoing growth in construction, which all points to a resounding revival of UK economic growth in January.

"The situation is certainly a lot brighter than seen in the final quarter of last year, when the economy contracted 0.2%, and a slide back into recession is now looking increasingly unlikely."

NIESR, however, gave a gloomy outlook for 2012 and while it expects the economy to return to growth of 2.3% in 2013, this is only if the eurozone debt crisis is resolved.

The institute says unemployment will rise to 9.1% before that, and may never return to its pre-crisis level without action by the Government to boost near-term spending.

Unemployment currently stands at 8.4%, and NIESR predicts it will remain above 7% in 2014.

NIESR's director Jonathan Portes said the UK ran the risk of "significant long-term economic and social damage" without measures to boost job creation.

He said the Government has room to boost spending in infrastructure projects in the near-term without harming Britain's credibility as a debtor.

The UK is already near recession - two consecutive quarters of economic contraction - after it was revealed that GDP shrank by 0.2% in the final three months of 2011.

NIESR has long urged the Government to ease its austerity drive.

It estimates in the report that debt-financed investment spending of around £15bn would reduce the expected unemployment rate by 0.3 percentage points.

"The credible commitment to a sustainable fiscal policy over the longer term provides the government with the flexibility to provide a clearly defined and temporary boost to near-term demand," the institute said.

NIESR's report came after the Institute for Fiscal Studies said earlier in the week that the case for Government stimulus had grown.

However, the IFS also noted the risk that spending financed through extra borrowing might erode market confidence and drive up borrowing costs.

The debate about the Government's tough austerity plans, aimed at erasing the budget deficit over the next five years, has intensified following the recent poor GDP figures.

Chancellor George Osborne, who will deliver the next Budget on March 21, has pledged to stick to his fiscal plans despite the weakening economy.

NIESR predicted inflation would fall, with the consumer prices index falling to 2.2% this year and 1.4% in 2013.