Britain is facing a double-dip recession in the first half of next year, and will need to print more money, the Organisation for Economic Cooperation and Development has said.
In its semi-annual report on the outlook in its 34 member states, the international economic research group (OECD) said weak international demand and fiscal consolidation has halted the recovery in the UK.
The OECD expects the downturn to be “modest”, with 0.03% decline in output for the current quarter of this year and 0.15% contraction in the first quarter of 2012.
Technically six months, or two consecutive quarters, of negative economic growth indicate a recession.
The organisation also said the Bank of England should expand its quantitative easing programme to £400bn – effectively pumping a further £125bn into the economy by buying government bonds – to support growth.
It warned that unemployment could reach 9% by 2013, but that inflation would fall below the 2% target.
The Paris-based group said the overall global outlook has worsened since its last report and that the euro area, which is one of the UK’s major trading partners, is also facing a mild recession.
It added that a split in the single-currency area would result in massive wealth destruction, bankruptcies and a collapse in confidence in the region, as well as a deep depression in the world economy.
The Bank of England may need to print more money in order to stimulate economic growth
The economic report comes on the eve of George Osborne’s Autumn Statement, in which he is expected to reveal raft of measures including a £30bn infrastructure plan.
The Chancellor told Sky News that it was clear from the OECD report that “these are very difficult times for many countries in the western world” and that the deep downturn in Europe would be a challenge for Britain.
“We’ve got to weather the current economic storm but we’ve got to lay the foundation for a stronger economic future, ” he added.
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Meanwhile, the Shadow Chancellor Ed Balls said: “This out of touch Government needs to realise that a flatlining economy and more people out of work claiming benefits make it harder to get the deficit down.
“And we will find out tomorrow just how much extra borrowing than planned a year ago David Cameron and George Osborne’s failed plan is costing the country.
“It cannot be right to borrow tens of billions of pounds to keep people on the dole, when we could be investing to get people back to work with Labour’s five point plan for jobs.”
The OECD forecast for Britain goes a step further than the growth downgrade from the British Chamber of Commerce (BCC).
In its latest quarterly economic report, the business lobby group has slashed its prediction for UK output growth for the rest of this year, as well as 2012 and 2013.
It expects growth to be “very weak” until mid-2012 due to the impact from the eurozone debt crisis, and has revised its prediction of gross domestic product (GDP) rise next year to 0.8%, less than half the 2.1% it had expected previously.
Although it expects unemployment to increase by 150,000 over the next 12 months, the group has warned against “unjustified gloom about the UK’s economic prospects”, adding that conditions will gradually improve over time.
The BCC’s chief economist David Kern told Sky News: “We think the deficit cutting programme was right, is right, and the Government must stay its course.
“The Chancellor and the Government have gained a lot of credibility in the financial markets and I think tomorrow the Chancellor will be able to cash in on some of this credibility.
“Essentially keeping the credibility, keeping the triple A (credit rating) is absolutely vital, and I think that as long as he keeps that he’ll be able to spend some money tomorrow.”
The BCC also expects the Bank of England to keep the base interest rate at 0.5% until the final quarter of 2012, but pump a further £50bn into the economy through quantitative easing.
It added consumer spending would decline by 1.2% in 2011 but begin to grow from 2012.
The services sector, which includes businesses ranging from hairdressers to accountants, has already seen its fastest fall in activity for two and a half years as consumers rein in spending, according to the Confederation for British Industry.