Alternative scenarios for growth in 2012

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Today we publish Economic Prospects: 2012 - our review of the key challenges that lie ahead for the UK economy and manufacturing in the next twelve months.

Earlier today I blogged about our central forecast for growth in 2012. We expect the UK economy to grow by 1.0% on the back of improvements in investment and net trade. This comparatively weak figure reflects subdued consumer demand and government spending cuts.

There are significant uncertainties around this forecast. Most notably potential outcomes of the eurozone debacle. In this blog we reflect on possible best- and worst-case scenarios, and the possible results of these.

Our downside scenario assumes that default or breakup in the Eurozone causes world trade to follow a similar path to that which followed the Lehman crisis.

A significant drop in activity would further delay the recovery in business investment, which would remain flat through 2012. This weaker scenario would see the UK enter a mild recession. Economic output would contract by 1.3% in 2012 and a further 0.6% in 2013. The economy would not return to 2007 levels of output until 2016 and the unemployment rate could rise above 10%.

Our upside scenario assumes a firm resolution to the Eurozone crisis that materially improves business and consumer confidence, leading to more normal levels of consumption and investment for a post-recession period.

In this scenario, growth in 2012 could reach 1.9%, and economic output would return to 2007 levels in 2013. We would expect unemployment to start falling back by the end of 2012, providing a further boost to spending.

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