BRITAIN HAS a 70 per cent chance of falling back into recession under the “increasingly more likely” scenario that no swift solution is found to the euro zone debt crisis, a respected think tank has warned.

The British economy, which has been “stagnant” over the past year, could be tipped into decline after fears of a European debt default eroded confidence in financial markets, according to the National Institute of Economic and Social Research.

A fresh slump is likely if European leaders continue to “muddle through” the crisis, but even if they find a speedy resolution ,there is still a 50 per cent chance of Britain suffering a double-dip recession by the end of 2012, it predicts. The development increases the pressure on British chancellor George Osborne to alter his economic policies.

The institute expects Britain to grow by 0.9 per cent in 2011 and 0.8 per cent next year. That would mean it will not be until 2013 that the UK returns to its pre-recession peak, making it the slowest recovery since the first World War.

There are also “significant downside risks” to this forecast if politicians fail to get to grips with the euro zone problems.

The body put more pressure on the government to relax its austerity measures when it said fiscal policy could be loosened modestly to improve prospects for output and jobs. It currently expects unemployment to rise further to 8.9 per cent at the end of 2012.

The slow growth means the British government is likely to miss the deficit reduction targets set by its independent financial watchdog. It predicts a deficit of 6.7 per cent in the year to April 2013, compared to a target of 4.5 per cent.

The grim predictions will fuel fears about Britain’s economy after manufacturing figures released earlier this week heightened worries that the economy would contract in the final quarter of 2011 amid the biggest squeeze in living standards in a generation.

The think tank’s report also warns that there is a 50 per cent chance of the entire 17-nation euro area slipping into recession this year or the next if the debt crisis is allowed to drag on.

That would spell a disaster for Britain by hitting the economies of some of its biggest trading partners at a time when the government is trying to “rebalance” the economy by boosting exports.

The think tank added that “global economic prospects have deteriorated markedly in recent months” as the debt crisis hits confidence and forces up borrowing costs for companies.

It downgraded its forecast for global growth to 4 per cent in 2011 and 2012, down from 4.5 per cent previously, but this is based on the assumption that the euro zone crisis is resolved quickly.

Even in this “best-case” scenario, it believes Spain and Italy are likely to face a recession and there is a 30 per cent chance of the entire euro zone slipping into decline.

Global markets gyrated wildly in recent months amid panic that Greece will default on its debts leading to another banking crisis.

After months of dithering, euro zone leaders announced a rescue package that involved boosting the bailout fund to €1 trillion, allowing Greece off 50 per cent of its debt repayments and shoring up banks’ balance sheets.

However the package was thrown into doubt this week when the Greek government announced it would hold a referendum on the package, causing fresh slumps in stock markets.

Shadow treasury minister Owen Smith said: “These are really worrying forecasts for our economy, for families feeling the squeeze, young people out of work and businesses on the edge.

“Trying to cut spending and raise taxes too far and too fast isn’t working because the slow growth and higher unemployment the government has delivered will make it harder to get the deficit down.” – (PA)