'Permanent scar' left on UK economy by credit crisis
The financial crisis will leave a "permanent scar" on the UK economy, new analysis claims.
The National Institute of Economic and Social Research (Niesr) predicts the recession will last through out 2009, meaning the economy will shrink by 1.5 per cent next year.
At the end of 2009 the UK economy will have lost two per cent of its value compared to the peak in the second quarter of 2008.
"Much of the loss will eventually be recovered, but the events of the past year are likely to have left a permanent effect, or scar, on trend output," Niesr found.
"We expect around one per cent of output will be lost permanently. The overall long run loss of trend output in our projection would have been greater but for the fall in oil prices."
As a result of the recession the unemployment rate is set to rise from 5.8 per cent currently to seven per cent and 7.5 per cent (the equivalent of 2.5 million) in 2010 and 2011.
Niesr also expects inflation having a one in ten chance of falling negative, and interest rates to fall a further one per cent to two per cent in the coming years although it does not rule out further drops.
Ahead of today's pre-Budget report, Niesr predicts a tax cut worth £30 billion - or two per cent of GDP focussing on tax rebate and National Insurance contribution holidays would "significantly lessen the pain of the current recession".
However, it also warned an international movement of tax cutting is needed to stop cash leaking out of the country.
"Embarking on a fiscal expansion unilaterally would result in up to half of the spending increase leaking straight out of the domestic economy through increased imports,"
The Niesr report stated: "If countries were to coordinate then they all increase their import demand."