Economic growth in the United Kingdom will be restrained by weak demand in the world economy, in particular the euro area, a study by the National Institute of Economic and Social Research (NIESR) showed Friday.
The think tank expects the economy to contract 0.5 percent this year. Gross domestic product may rebound next year with 1.3 percent growth and the economy may see 2.4 percent expansion in 2014, despite downside risks from the euro area, according to the institute.
The economy contracted 0.7 percent in the second quarter, the fastest pace in more than three years due to widespread weakness in construction, manufacturing and services output.
The cyclically adjusted current budget deficit is expected to be eliminated in 2016-17, in line with the government's revised target.
The continued weakness of the U.K. economy reflects both a lack of demand and the supply-side constraint of an unreconstructed banking system, the NIESR noted.
"There is scope for a less aggressive path of fiscal tightening," the report said.
"The government should consider on-balance sheet funding of key projects, concurrent with a comprehensive restructuring of banks and key funding markets."
If the fiscal consolidation was delayed by three years, the resulting loss of output and employment would have been substantially less, and less long-lasting, a separate research report by the NIESR and the London School of Economics said.
The report explored the economic impact of immediate versus delayed fiscal consolidation in the U.K. On the other hand, a "no fiscal consolidation" scenario would have led to unsustainable debt ratios, it added.
NIESR forecasts world growth to slow to 3.3 percent this year and 3.7 percent next year. The institute expects tensions to heighten further next year.
European countries will face remarkably divergent growth paths next year with Germany growing above trend and Southern Europe in deep recession, the institute said.
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