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Recession to hit UK early next year, OECD says

Government may have to temporarily relax its deep austerity drive, says OECD

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The UK is to start the new year with a "modest" recession, the Organisation for Economic Co-operation and Development said on Monday as it slashed its growth forecast for 2012.

The OECD also called on the Bank of England to inject more quantitative easing to help revitalise the stagnating economy.

On the eve of chancellor George Osborne's latest budget and growth announcements, the Paris-based agency said the government may have to temporarily relax its deep austerity drive if conditions turn even worse.

Britain's output will fall by 0.1 percent in the fourth quarter of 2011 and by 0.6 percent in the first three months of next year, before picking up during the rest of the year, the OECD said.

Economists define a recession as two consecutive quarters of contraction.

The OECD predicted Britain's economy would grow by 0.5 percent next year, down from the 1.8 percent it forecast in May. Its forecast is just half the 1 percent average for 2012 growth seen in a Reuters poll of 42 economists conducted earlier this month.

Public spending cuts, falling household consumption and weak exports have weakened the UK economy, and more support is urgently needed to help it through strong headwinds, the OECD said in a report.

The Bank's decision to keep interest rates at a record low of 0.5 percent since March 2009 and to pump £275 billion into the economy through the purchase of UK government bonds has been helpful, but it should go further, the OECD said.

Growth will be even weaker than forecast unless the central bank expands the scheme to £400 billion pounds by early 2012, a far higher figure than most economists expect by that time.

That would leave the Bank with almost 40 percent of the total stock of outstanding government bonds.

"More support is needed urgently as headwinds are strong," the OECD report said.

Britain's independent fiscal watchdog is also expected to cut its forecasts on Tuesday, forcing Osborne to borrow more to balance the books.


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