The UK has a 50/50 chance of falling into recession within the next 18 months following the Brexit vote, says a leading economic forecaster.
The National Institute of Economic and Social Research (NIESR) says the country will go through a “marked economic slowdown” this year and next.
It says inflation will also pick up, rising to 3% by the end of next year.
“This is the short-term economic consequence of the vote to leave the EU”, said Simon Kirby of the NIESR.
Overall the institute forecasts that the UK economy will probably grow by 1.7% this year but will expand by just 1% in 2017.
This would see the UK avoid a technical recession, typically defined as two consecutive quarters of economic contraction.
Mr Kirby argued that the June referendum vote had led to such financial and political uncertainty that this would bear directly on the spending and investment decisions of both businesses and households.
“We expect the UK to experience a marked economic slowdown in the second half of this year and throughout 2017,” he said.
“There is an evens chance of a ‘technical’ recession in the next 18 months, while there is an elevated risk of further deterioration in the near term.”
The pick-up in inflation to 3% will mainly be due to the recent fall in the value of the pound, but that should be ignored by the Bank of England the Institute said.
“The Monetary Policy Committee should ‘look through’ this temporary rise in inflation and ease monetary policy substantially in the coming months,” Mr Kirby said.
The institute forecasts that the Bank will reduce interest rates to just 0.1% eventually, after cutting them to 0.25% later this week.
In a separate report, the CBI business lobby group says that the UK’s small and medium-sized manufacturers (SMEs) fear they will be hit by a fall in orders in the next three months.
Its latest quarterly survey of SMEs says business optimism has fallen at its fastest rate since January 2009, when the UK economy was falling into recession.
Now, the culprit is the uncertainty following June’s Brexit vote.
Despite this, the 472 firms surveyed said that current orders were stable.
Rain Newton-Smith, the CBI’s director for economics, said: “The UK’s SME manufacturers reported higher production, more staff hired and now expect to sell more of their world-class goods overseas over the next quarter, with a weaker sterling having a hand in this.
“But overall they do feel less optimistic and are scaling back some investment plans in machinery and plants.”
The CBI’s survey is just the latest to suggest that the effect of the June referendum vote may be, in the short term at least, to depress business activity.
On Monday the Markit/CIPS manufacturing purchasing managers’ index suggested that activity among UK manufacturers in July had shrunk at its fastest pace for three years.
Meanwhile shoppers continue to benefit from falling prices in the UK’s shops, stores and supermarkets.
According to the latest survey from the trade body the British Retail Consortium, overall prices fell by 1.6% in the year to July.
Food was 0.8% cheaper than a year ago and non-food items were 2.2% lower.