Wednesday 3 August 2016 2:00 am

Think tank warns of 50-50 chance of post-Brexit recession

The government will borrow an extra £47 billion between now and the end of the decade as a result of the UK's decision to leave the European Union, economists have warned.

The new economic outlook from the National Institute of Economic and Social Reserach (Niesr) also said there was a 50-50 chance of the UK economy slipping into recession before the end of next year as the think tank called for a combination of lower interest rates and a massive extension of quantitative easing to boost GDP.

"We expect the UK to experience a marked economic slowdown in the second half of the this year and throughout 2017," said Simon Kirby, head of macroeconomic modelling and forecastsing and Niesr. "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."

Niesr also forecasts unemployment will creep up, rising from its current level of 4.9 per cent to 5.7 per cent by the end of next year. The depreciation of sterling will also cause inflation to jump above the Bank of England's official two per cent target, peaking at 3.1 per cent in 2017.

Niesr economic forecasts

  2016 (February forecast) 2017 (February forecast)
GDP growth 1.7 per cent (2.3) One per cent (2.7)
Unemployment 5.2 per cent (5.1) 5.7 per cent (5.1)
Inflation 0.8 per cent (0.4) 3.1 per cent (1.8)
Government deficit £71bn (£61bn) £65bn (£41bn)

While public spending will run ahead of George Osborne's plans, Niesr still believes the government could balance the books by 2021/22. It also said the current account deficit could half between 2016 and 2017.

The forecasts, published today, appear to be a tempering of pre-referendum predictions, when Niesr suggested inflation would hit four per cent and sterling would reach parity against the euro if the UK voted to leave.

Tommorow, the Bank of England meets in one of the most closely-watched monetary policy committee (MPC) gatherings since the financial crisis. On Thursday the Bank will not only announce its latest policy decisions in terms of both interest rates and quantitative easing, but publish its first post-referendum forecasts for economic growth, unemployment, prices and wages in the Inflation Report.