UK economy is facing a “bleak” new year, with a real risk of returning to recession during 2012, a think tank is warning.

The only good news for consumers is an expected fall in inflation, which will ease the squeeze on spending power in those households which remain in work, says the center-left Institute for Public Policy Research.

The thinktank’s chief economist, Tony Dolphin, says during 2011 “growth was lower than expected, unemployment higher and public sector borrowing greater. Looking ahead, he sees no obvious way to shore up the economy. ”
“In the short term, economic policy has become a matter of hoping that something turns up – and that is why, for the UK economy, 2012 is unlikely to be a happy new year.”

“The eurozone crisis is unresolved and country after country is being forced to adopt extreme austerity measures that will result in large falls in output.

As a result, the whole eurozone economy is believed to be back in a mild recession.

“Going into 2012, the risk is that talk of austerity at home and crisis in Europe will dampen spirits to such an extent that the economy drifts into recession.”

Dolphin says, even talk of austerity could send the UK into a double dip. “Going into 2012, the risk is that talk of austerity at home and crisis in Europe will dampen spirits to such an extent that the economy drifts into recession,” he says.

“If the economy does find itself back in recession, it is likely to have to find its own way out of it. There are ultimately only three solutions: the government decides to increase public spending, or overseas demand for UK output increases substantially, or UK households and companies are given some reason to spend more.

“The first is not going to happen, the second is extremely unlikely, and so we left with the third. But with no prospect of tax cuts or lower interest rates, it is not clear what in the short term the catalyst for more spending by the private sector will be.”