NIESR forecast 0.5 per cent shrinkage in 2012

Return to growth in 2013, but stagnation continues.

George Osborne and Danny Alexander in front of Number 11. Photograph: Getty Images

The National Institute for Economic and Social Research has released its quarterly economic forecast for Britain. It predicts the economy will contract by 0.5 per cent over 2012, and then return to a low level of growth in 2013, with GDP increasing by just 1.3 per cent over the year.

The forecasts also predict unemployment taking a second upward swing, peaking next year at 8.6 per cent, 0.4 percentage points up from where it is currently. The structural deficit, orignally planned to be eliminated by 2015, will take until 2016-17 to be reduced to nothing.

Inflation should drop under its 2 percent target this year, which is a mixed blessing. On the one hand, high inflation coupled with stagnating wages has made life harder for many, but the inflation target is usually seen as a symettrical one. If it drops too low (below one per cent) that's just as bad as it being too high. In addition, of course, there are questions as to whether targeting inflation is even the right thing to be doing in the circumstances. The sort of looser monetary policy which many believe could bring us out of depression would almost certainly lead to increased inflation, and that surely isn't a bad thing given the consequences.

NIESR agrees that the second quarter was abnormally hurt by the "jubilee effect", but points out that even without that, the trend is negative. The overall conclusion on growth figures, however, mirrors a case we made in April: technical recession on its own doesn't matter, when whichever side of the barrier we fall, Britain is firmly in stagnation.