National Institute of Economic and Social Research revealed its second quarter review of the UK and the world economy in its regular press conference chaired by the director of the organisation John Portes yesterday in Westminster,London.

The press conference started with the presentation of the world economy by research fellow Dawn Holland. According to the review that is presented by Holland global growth will fall from 5 per cent in 2010 to 4.5 per cent in 2011.This reflects the rise in the oil price which reached $40 per barrel in the last six months; supply-chain disruption due to earthquake in Japan last March; continuous sovereign debt crisis in Euro Zone. The weak domestic demand will continue to keep monetary authorities in the US,UK and Japan reluctant to raise interest rates despite rising inflationary pressures.

The director John Portes,Research Fellows Down Holland and Simon Kirby at NIESR’s 2011Q2 press conference chaired by Portes in Westminster,London.

Increasing   unemployment (8.9% this year,8.3% in 2012)in the US economy and high oil price will cause decline in real wages this year and affect the consumer spending. The US’ budget agreement will be able to stop uncertainty in the market while gradual rise in the debt ceiling leaves no room for unexpected borrowings in the rest of 2011.GDP growth of the country will be to 2.5% in 2011.

Output of Japan economy,  that is contracted by 9 per cent due to the earthquake and tsunami in March, is expected to remain 1.5 per cent below the pre disaster level despite the sharply increased private sector investment. The country’s GDP will decline by 0.3 per cent this year and the recovery to pre-recession level will come three quarters later than expected due to the disaster.

On the other hand China by 9.9 percent and India by 8.7 per cent will continue to drive world growth according to forecast.

Euro Area will continue to suffer from the effects of its sovereign debt crisis caused by Greece, Portuqal and Ireland .The bailout programmes allow these countries to borrow at rates of interest lower that the rates in the open market. NIESR’s central forecast assumes that the second bailout package agreed for Greece is able to contain the sovereign crisis. Costs of Greek restructuring are primarily borne by Greece but it is expected to reduce GDP growth by 0.3 percentage points in 2011-12 with bigger effect in Germany.However in the long term, taxpayers in the rest of the Euro Zone will bear much of the burden of the programmes.

Restructuring Greece has little impact on the UK economy but restructuring Ireland or a larger Euro Zone country like Spain and Italy will be more costly according NIESR’s forecast second part that was presented by research fellow Simon Kirby.  The UK economy which has been stagnant last nine months will grow 1.3 per cent this year and 2 per cent in 2012.The unemployment rate will increase from 7.9 per cent in 2011 to 8.3 per cent in 2012 and the country’s productivity performance will rise by only 1 per cent over the next few years. Consumer price inflation will fall from 4.2 per cent this year to 1.9 per cent in 2012.However low interest rates will continue to affect household fiancés negatively.

The Forecast shows that household incomes in the UK will continue to decline as wage growth has been overwhelmed by the increased inflation and tax rate. This will contract consumer spending by 0.8 per cent this year. Public sector borrowing will fall by 1 per cent of GDP in 2011-212. NIESR estimates that The Chancellor will miss his primary target of balancing the budget by 2015-16 by 1 per cent of GDP.

The press conference ended with the questions of the press members.


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