14/12/2011 10:52 GMT | Updated 14/12/2011 11:09 GMT

Recession In Early 2012 Warning By Standard Chartered

The UK will be back in recession at the start of the new year because of government cuts, with a bleak economic outlook predicted for 2012, according to Standard Chartered.

A report released by the financial service company [PDF], which recently topped a list of global firms for the accuracy of its forecasts, said: "The UK economy is likely to be in recession going into 2012 as the negative impact of fiscal tightening and falling real incomes is compounded by a downturn in demand from the UK's largest trading partner, the euro area."

Other predictions by the bank were that the eurozone's economy would shrink by 1.5 per cent next year, with recommendations that GDP will contract before "bottoming" and "eventually recovering" at the end of 2012.

Standard Chartered warned that the European sovereign debt crisis will "linger" in 2012 with no "immediate solution". The report said, "the road to such a solution [monetary easing in Europe] is likely to be long and bumpy, involving further stress in the markets".

Rising unemployment is predicted to dampen household spending in the euro area next year as people spend less.

Gerard Lyons, Chief economist at Standard Chartered, said: "In the UK we have a divided and disconnected economy. The biggest disconnect is the high rate of youth unemployment in Britain. We need to have a more pro-active stance to address the issue.

"In a situation where there is greater economic uncertainty naturally people will find it more difficult to get jobs and the labour market environment will be a lot tougher."

The report indicated that no European country is safe from the crisis, adding: "Even the north-euro area economies, which did well in the first half of 2011, are not immune to the risk of negative growth."

The bank predicted that there would be a "two-speed" economy in 2012 with a "fragile" West but "resilient" East. It said world economies grew by 4.3 per cent in 2010, cooling down to 3 per cent in 2011 and this is likely to slow down to 2.2 per cent next year.