UK economy to enter recession soon, says report

UK economy to enter recession soon, says report

The UK economy could rebound in 2013 if the eurozone crisis is resolved, Niesr said
The UK economy will enter recession in the first half of the year as households continue to cut back, an influential think tank has warned.

The National Institute of Economic and Social Research (Niesr) said the government should temporarily ease its spending cuts to promote growth.It expects the economy to shrink 0.1% in 2012, but to grow 2.3% in 2013 if the eurozone debt crisis is resolved.Niesr said, however, that deficit cuts had bolstered market confidence.

The UK is already close to another recession - defined as two consecutive quarters of economic contraction - after official figures in January showed that the economy shrank by 0.2% in the final three months of 2011.

In its UK and World Economy Forecast Niesr said: "We forecast a return to technical recession in the first half of this year, as households continue to retrench, credit conditions remain tight, and businesses are reluctant to invest given uncertainty about both domestic and foreign demand."
Niesr said economic conditions will not improve in the short term, as both the private the public sectors are still focused on paying off debts. "Over the near term we do not expect economic conditions to improve," the report said.

The think tank predicted that inflation would fall sharply, with the consumer price index down to 2.2% this year and 1.4% in 2013.But there were grim forecasts on unemployment, which Niesr expects will rise to about 9% this year, from 8.4% in the three months to November, and will remain above 7% in 2014."Unemployment at this elevated level for such a long period is likely to do permanent damage to the supply side of the economy, with large long-run economic costs," the report said.

Niesr suggests relaxing the government's austerity programme. "The UK economy currently suffers from deficient demand; the current stance of fiscal policy is contributing to this deficiency. A temporary easing of fiscal policy in the near term would boost the economy," the group said.
Little scope

More investment would not derail the chancellor's long term fiscal goals, Niesr said.
On Monday, the Institute of Fiscal Studies said the government could safely cut taxes temporarily, without worrying that the Bank of England would raise rates in response.But the IFS that there was little scope for big or long-term tax cuts, which risked undermining investor confidence.

"The chancellor faces his third budget with the economy and public finances in considerably weaker shape than he had hoped a year ago," said Paul Johnson, director of the IFS.
Last month, Chancellor of the Exchequer George Osborne said he would continue with the coalition government's efforts to reduce the deficit, despite criticism that it is choking off recovery.

A Treasury spokesman said: "As Niesr have said, the government's commitment to deficit reduction has helped maintain market confidence. "They expect the government to meet its fiscal mandate and for the UK economy to grow more strongly than the euro area this year and next."

Meanwhile, Niesr forecast global growth of 3.5% for 2012, led by China and India, and 4% in 2013. It forecast US economic growth of 2% this year.An independent Scotland could be more constrained on economic policy than at present, a study has suggested.

Scottish independence

The report also considered the monetary and fiscal policy choices facing Scotland if it leaves the union.Niesr concluded that retaining sterling would be "sensible" for Scotland, but warned that currency union could restrict fiscal policy. The Scottish government said the report "validates" its aim to retain sterling and insisted Scotland would be in a "healthier" financial position.
The report said that it is "doubtful" whether the Bank of England would extend lender-of-last-resort facilities to Scottish institutions, something First Minister Alex Salmond has argued for.
Niesr adds: "With a pro rata transfer of existing UK public debt, Scotland would enter independence heavily indebted with no insurance from fiscal risk sharing or fiscal transfer mechanism with the rest of the UK.

"Even with a favourable settlement on future oil revenues, its fiscal balances are likely to be volatile with large deficits in some years as a result of its dependence on oil revenues," the report said.
Source: BBC

Sri Lanka is no pearl on China's string, Rajapaksa says

Sri Lanka is no pearl on China's string, Rajapaksa says
By C. Bryson Hull | Reuters – Tue 31 Jan, 2012

COLOMBO (Reuters) - President Mahinda Rajapaksa was emphatic: China's presence in Sri Lanka is strictly business, and not political.

Challenged on speculation that China financed and built the $1.4 billion Mahinda Rajapaksa port on Sri Lanka's south coast so it could sneak a naval base into India's backyard, Rajapaksa laughed and said his giant neighbour had not complained.

"No one has said anything to us, not India, not even the U.S. Even the U.S., the British and India are now inviting China to come and invest," he said on Tuesday at a meeting with foreignjournalists.
Located just off of India's southern tip, the island of 21million has become a visible front in the cold war between theAsian giants, where mutual suspicion crossbred with commercial ambition have produced a construction arms race of sorts.

"They try to match each other. A coal plant on one side of the country by the Chinese, another by the Indians on the other side. A port in the south by the Chinese, a port in the north by the Indians," said a European diplomat based in Colombo.

Sri Lanka's location astride an ancient and lucrative trade route in the Indian Ocean makes it of strategic commercial and military interest to Washington, New Delhi and Beijing.
That, some analysts theorize, makes it a prime part of China's so-called "String of Pearls" strategy to surround India and project its presence by setting up coaling stations under commercial auspices at port after port in the Indian Ocean.

So far, the weapons of influence have been financial: India and China have both funded huge chunks of Rajapaksa's $6 billion post-war overhaul of roads, railways, ports and power plants.

STICKY IRANIAN WICKET
Rajapaksa's foreign policy is firmly rooted in Sri Lanka's Non-Aligned Movement history, and during the last year of a three-decade war with the separatist Tamil Tigers, he played China,India and the West off each other as it suited him.

So now, with the West lobbying for a probe into war crimes allegations from the conflict's bloody end in 2009 and U.S.sanctions on Iranian crude threatening almost all of Sri Lanka's oil supply, Rajapaksa once again is taking stock of his friends.

"We are talking with the Indian government and the U.S.," he said, referring to ongoing talks with New Delhi and a visit later this week by Luke Bronin, a U.S. deputy assistant treasury secretary, who is expected to brief the government on its options regarding the Iran sanctions.
"We'll tell them to give us an alternative. There must be an alternative. We can't stop all the railways," Rajapaksa said.

"Finally, they are not punishing Iran, they are punishing us, the small countries." Asked if he would consider seeking a waiver from the U.S.sanctions, Rajapaksa said: "We might, because 93 percent of our crude we are depending on Iran for."

The United States, at the fore of calls for Sri Lanka to look into war crimes allegations itself or else face an external probe, would likely extract concessions from the government on post-war reconciliation and reduced ties with Iran in exchange for a waiver.

"We likely won't want to spend that political capital," a senior government official involved in the Iran negotiations told Reuters on condition of anonymity. Iran is Sri Lanka's fourth-largest trading partner and biggest tea buyer.

NOT INDIA'S CUBA
That's where both India and China come in: both support Sri Lanka against calls for an external war crimes probe, and in finding a way around the Iranian oil sanctions.

China for the third year running was Sri Lanka's largest bilateral donor, committing $784 million through the first nine months of 2011, or 44 percent of the total. India's bilateral loans pale by comparison in the same period at barely $9 million, but that primarily has to do with the fact that private Indian companies invest directly whereas China loans the money for projects in which its companies invariably do the work and provide the equipment.

Over the past two months, the lawn in front of the defence ministry on Colombo's Galle Face seafront in Colombo has been a show of Chinese commercial force: more than once it has been turned into an outdoor bazaar of freshly delivered Chinese buses, bulldozers, road graders and auto-rickshaws.

A Western diplomat in Colombo said commercial interests were a much better explanation for China's push into Sri Lanka than the "string of pearls" theory, which he dismissed as "existing mainly in the minds of Indian think tanks".

Sri Lanka would fall in line with "Mother India" very quickly if anything happened between India and China, the diplomat said. "This isn't going to become India's Cuba."

(Editing by John Chalmers and Sanjeev Miglani)