The coming year will rival 2009 for economic weakness as output is hit by the continuing debt crisis in the euro zone, according to a large majority of economists polled by the Financial Times.
In a survey of 83 economists, including 11 former members of the Bank of England’s monetary policy committee, three times more respondents thought the economic outlook would deteriorate than thought it would improve in 2012.
Even if there is a double-dip recession in 2012, however, only a small minority are urging George Osborne to abandon his seven-year austerity plan in favor of stimulating the economy with tax cuts or more public spending.
Sir John Gieve, former deputy governor of the Bank of England, said: “The [chancellor’s deficit-reduction] plan was a bit bold, but having got the credit for that in [lower government borrowing] rates we should not backtrack now.”
Only 21 economists agreed with Ed Balls, shadow chancellor that the austerity measures were “too far and too fast”. But the support for Mr Osborne’s strategy on borrowing did not translate itself into any widespread optimism for 2012.
Almost all those expressing an opinion said that the UK outlook would be much worse if the euro collapsed, demonstrating their conviction that the UK will not be the master of its own economic destiny this year. Asked whether the common currency would survive, 43 of those expressing an opinion thought a rupture would be avoided, while 17 thought there would be more than one currency in what is currently the euro zone.
Sir Alan Budd, founding chairman of the Office for Budget Responsibility, described the UK’s predicament as a “choice between extended misery if the euro survives and catastrophe if it doesn’t”.
Sir Howard Davies, former head of the Financial Services Authority added a recession was almost certain in the first half of the year: “Whether that is short or long depends on a resolution of euro zone tensions.”
The survey detected a glimmer of hope should a solution be found to the euro zone’s woes, as economists expect the inflation rate would fall rapidly, giving households confidence to spend in the second hald of the year.
Inflation is expected to fall rapidly to the Bank’s 2 percent target, as last year’s increases in commodity prices and value added tax fall out of the annual comparison.
Kate Barker, a former MPC member, predicted that “more substantial growth may resume in the second half, although unemployment may well rise throughout the year”.A new year survey has not been as gloomy since 2009, when the economy shrank 0.8 percent.
While there was no consensus on what the government should do to promote growth, only three out of the 83 economists polled thought abolition of the 50p income tax rate would help the economy.