China and India will continue to drive world growth, the think tanks says but high oil prices and inflation will hold back global prospects. Growth is also hampered by the ongoing sovereign debt crisis in Europe, which has pushed up precautionary savings even in countries not restrained by severe fiscal austerity programmes.
According to the group: “Inflationary pressures are rising, but monetary authorities in the US, UK and Japan remain reluctant to raise interest rates in the face of weak domestic demand. The balance of risks to global growth is weighted heavily on the downside.”
As to the UK, NIESR says public finances will be not improve as fast as many expect due to weaker growth and consumer spending. It expects real household incomes in the UK will continue to fall in real terms as wage growth fails to keep pace with inflation and higher taxes. It also expects unemployment will rise in 2012.
“This strain on real incomes will translate into a fall in consumer spending of 0.8% this year. Household finances are still vulnerable to an interest rate rise. Just a 50 basis points rise in interest rates would knock a third percentage point off real income growth next year.”
NIESR says the UK’s short term fiscal policy is too tight, noting a modest loosening would improve prospects for output and employment with little or no negative effect on fiscal credibility.
