Britain's economy will return to growth in the last quarter of this year, as companies start to rebuild inventories, but strong growth will not return until 2013, a leading academic thinktank forecast on Wednesday.
The National Institute of Economic and Social Research said a turning point in the inventory cycle and the impact from the sales tax cut will help Britain's economy to expand by 0.5 percent in the last quarter after a 0.1 percent drop in Q3.
But the thinktank warned that the recovery was expected to be weak and kept its forecast that the British economy would contract by 4.3 percent in the whole of the year, the sharpest decline since the aftermath of World War Two.
"We expect to see continued contraction in consumer spending and private sector investment," said Simon Kirby, a research fellow at the NIESR, adding that lending was key for sustainable growth in the economy.
"The weakness of bank lending remains as a concern and it is necessary that it strengthens if the economy is to return to sustained growth. Lending by monetary financial institutions remains weak," NIESR report said.
The think tank expects the economy to grow by a modest 1 percent next year and 1.8 percent in 2011, in part reflecting a boost to exporters from weaker sterling.
NIESR's 2010 forecasts are more upbeat than that of the International Monetary Fund (IMF), which last week predicted the British economy would post modest growth of 0.2 percent next year.
Britain's growth prospects were dependent on the recovery in the rest of the world, where risk premia have fallen significantly since late April, providing support for growth, the think tank said.
Joblessness will continue to rise long after the economy returns to growth, hitting a peak of 3 million in 2011.
Britain's housing market has turned a corner, with new home sales stabilizing and stock of unsold homes declining, the think tank said, but added that the house-prices were still over-valued and would fall until mid-2011.
More Efficient QE
BoE could be more efficient with its quantitative easing program if it directly targeted the private sector, said NIESR's director Martin Weale.
"One has to ask whether they have tried hard enough," Weale said.
Though the BoE does include corporate bonds and commercial paper in its asset purchase plan, the overwhelming focus of the 125 billion pound quantitative easing program is on gilts.
NIESR believes the public finances will deteriorate more than government forecasts, with public sector net borrowing forecast to be in excess of 120 billion pounds by 2014, compared with government estimates of 97 billion pounds.
A combination of spending cuts, tax increases and an extension of working lives should be introduced to improve the public finances, Kirby of NIESR said.
"However, with an election due under a year, the introduction of formal fiscal rules is not a priority or even a possibility," the think tank said in its report.