Think-tank forecasts bleak years ahead for Britain

A gloomy report by the National Institute of Economic and Social Research (NIESR) said house prices will resume their decline because recent gains were driven by a lack of supply not strong demand.

"There has been talk of stabilisation and some recovery in the housing market, but we don't think this is the case," said Niesr economist Simon Kirby. "We only see growth in the housing market returning in 2012."

It also says unemployment will rise for another two years, peaking at three million, or nearly one in 10 of the workforce, in mid-2011. The jobless total is currently 2.38 million, or 7.6%.

The grim forecasts for the housing market and unemployment came as the Niesr warned of a feeble economic recovery in the UK in its latest quarterly report as banks continue to ration lending to businesses and households.

Sterling fell 1.34 cents against the dollar to $1.6325 and 0.55 cents against the euro to �1.1512, as traders digested the bleak outlook and concerns over rising Government debts.

The Niesr forecasts the economy to shrink by 4.3% this year before growing by a modest 1% next year and 1.8% in 2011 — far weaker than the Government's "optimistic" outlook.

"We expect to see a continued contraction in consumer spending and private sector investment," said Kirby. "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."

Figures on Friday are likely to show gross domestic product fell again in the second quarter of 2009 having slumped 2.4% in the first quarter — the worst performance since the General Strike of 1926, according to the Niesr.

It forecast a second-quarter decline of 0.4% followed by contraction of 0.1% in the third quarter, the sixth decline in a row. It pencilled in growth of 0.5% in the final quarter of the year but warned there will be no return to strong growth until 2013.

The scale of recession means further deterioration of the already battered public finances, the Niesr warned.

It said borrowing — due to peak at a record £175 billion this year on Treasury estimates — could still be running at £160 billion in 2013-14. That is £63 billion or 65% more than the £97 billion outlined by the Chancellor in the Budget.

The ballooning deficit will send the cost of servicing government debt spiralling from £25.6 billion this year to £50.7 billion.

Bank of England deputy governor Charlie Bean today urged the Government to bring the public finances back under control, through tax rises and public spending cuts.

"As the economy starts to recovery it will be necessary to put the public finances on a sustainable footing," Bean said.