The bank of England is expected to launch another round of quantitative easing (QE) this week, in the hope of preventing the UK falling into another recession, after the economy contracted by 0.2 per cent at the end of last year.

The bank is likely to pump at least £50 billion into the economy by purchasing government gilts from pension funds and insurers with electronically created money.

This round of QE, which is designed to bring down borrowing costs, follows a £75 billion injection into the economy last October.

Since the QE programme started in March 2009, the Bank has bought £275 billion in gilts.

A final decision on the latest round of QE will be made at this week’s Monetary Policy Committee (MPC) meeting.

Some economists believe that last week’s welcome news that the UK’s manufacturing and services sector has grown to its highest level for ten months may lead the MPC to review the scale of the latest round of QE.

Last week The National Institute of Economic and Social Research (Niesr) called for the government to ease back on spending cuts in order to encourage the economy to grow.

The think tank warned that the UK economy will enter recession in the first half of 2012 if households continue to cut back on their spending.

Niesr forecasts that the economy will shrink 0.1% in 2012, however if the eurozone debt crisis is resolved the UK economy could grow 2.3% in 2013, it 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,” the think tank said in its UK and World Economy Forecast.

The UK economy needs a fiscal boost of £10 billion to £20 billion in order to avoid another recession, a leading think tank said today.

In its annual Green Budget, The Institute for Fiscal Studies calls for Chancellor George Osborne to include a short-term fiscal stimulus in his budget.

This would buffer the UK economy against the eurozone crisis and the possibility of another recession which could see GDP falling in 2012 and 2013, and a substantial increase in national debt.

The stimulus could take the form of a temporary reduction in employers’ National Insurance contributions or VAT, or could be achieved by increasing investment spending.

‘Should the eurozone break up, or the economy do much worse than forecast for other reasons, then future borrowing would be increased and one – or both – of the Chancellor’s fiscal targets would be broken,’ the IFS said.

The think tank has cut its forecast for UK economic growth to just 0.3 per cent, substantially lower than Government’s 0.7 per cent target.

The report claims that the scale of the government’s austerity strategy is “almost without historical or international precedent” but by the end of the current financial year only 6% of the cuts will have been implemented.

The government is expected to beat its 2011/12 deficit reduction target of £127 billion by £3 billion.

IFS director Paul Johnson said: “The Chancellor faces his third Budget with the economy and public finances in considerably weaker shape than he had hoped a year ago.

“While it looks as though central Government is going to underspend against tight spending plans, this neither leaves much space for any permanent fiscal loosening nor avoids the fact that the vast majority of the planned – and unprecedentedly big – public service cuts are still to come.”

There was also some good news on the economy today, with Markit’s/Cips’ purchasing managers’ index (PMI) revealing that the UK manufacturing sector has returned to growth.

In January, activity in the manufacturing sector was at its highest level for eight months, reaching 52.1 points on the PMI index, where a reading above 50 indicates growth.

This represent a significant improvement from 49.7 in December, with manufacturing output and new orders increasing while manufacturing costs fell.

UK government debt rose to over £1 trillion for the first time in December, despite a fall in public sector borrowing.

Excluding bank bailouts and other financial interventions, public sector borrowing fell £2.2 billion to £13.7 billion in December according to the latest figures from the Office for National Statistics.

This was lower than City forecasts of £14.9 billion.

However, net debt increased from £883 billion in 2010 to £1,003.9 billion in 2011, representing 64.2 per cent of GDP.

The government has reduced borrowing by increasing taxes and cutting spending, with December representing the fourth consecutive month when borrowing has declined.

On average borrowing has fallen by around 5 per cent year on year over the past four months, compared with an average increase of nearly 7 per cent in the 10 years to the 2010-11 financial year, according to George Buckley, an economist at Deutsche Bank.

This has led to optimism among some economists than public sector finances may improve beyond the Office for Budget Responsibility expectations at the time of the Autumn Statement in November.

Earlier this week Adam Posen, a policymaker at the Bank of England also suggested that the UK’s economic outlook had improved, helped by the
second round of quantitative easing in October.

However, Mr Posen said that the improvement was not sufficient for the Bank’s forecasts to be upgraded.

After speaking at Nottingham Trent University, Mr Posen said: ‘Things are a little better … But that’s not enough good news in my world to suggest we have solved the problem, though I am going through the forecast round with my colleagues.’

The Bank of England expects the economy to grow by less than 1% for most of 2012, with inflation expected to fall below 2% at the end of the year.

The economic gap between cities doing relatively well during the economic downturn and those that have been hard hit by the recession, is expected to widen.

A report by the Centre for Cities, a research and policy organisation focused on improving the economic performance of UK cities, suggests that a combination of weak growth in the private sector and massive public sector job cuts is affecting different parts of the country very differently.

Cities such as Aberdeen, Cambridge, Edinburgh, London and Milton Keynes are expected to weather the downturn well, while Newport, Sunderland, Hull, Doncaster and Swansea are among the worst affected cities.

Many of the struggling cities are located in the north of England and the Midlands.

Employment is a key factor in determining how well cities are performing, with those with a high percentage of their population employed in professions such as law, finance and accountancy doing much better than those where the private sector is less dynamic.

Cities such as Aberdeen and Cambridge have a high number of business start-ups and tend to be more innovative, while the poorer performing cities have proportionally more people claiming Jobseekers Allowance and working in the public sector.

The Centre for Cities is calling on the government to support struggling cities by providing high-quality training so that their residents have the skills they need to find jobs and start businesses.

Alexandra Jones, Chief Executive of Centre for Cities, said: “During 2012 cities should take the lead in shaping their local economies, and the Government should give them the financial and political powers they need to make the right decisions for growth.

“Where cities face greater social and economic challenges, the government should offer support to help places adapt and respond to a rapidly changing global economy.”

Pessimism over the UK economy persists with the latest figures expected to show that the economy contracted in the fourth-quarter.

The Bank of England is expected to announce a further round of Quantitative Easing as early as next month.

This month’s official figures show that inflation has fallen from 4.8 per cent to 4.2 per cent but two new studies show that older age groups suffer the most from high inflation, and at 4.2 per cent it is still well above the government’s 2 per cent target.

Saga’s monthly Price Index shows that since the onset of the credit crunch in 2007, over-50s in the UK have experienced cumulative annual inflation of 20 per cent compared with around 15 per cent for the population as a whole.

Commenting on the latest inflation figures, Saga’s director general Ros Altmann commented that retail price inflation for the over 50s is still around 5.5 per cent, which is significantly higher that the nation’s average of 4.8 per cent.

Meanwhile, Alliance Trust’s monthly study of inflation rates also shows that older age groups are worst affected.

Although the Alliance Trust found that inflation rates slowed for all households over the month, the over-50s are suffering an inflation rate that is higher than the official rate of 4.2 per cent.

According to Alliance Trust’s figures, the inflation rate for people over 75 fell from 5.6 per cent in November to 5.1 per cent in December, and for the 65-74 age group inflation fell from 5.5 per cent in November to 5.0 per cent in December.

In comparison, inflation fell to 4.6 per cent for people between the ages of 30 and 49 in December.

Older age groups allocate a larger proportion of their income to energy costs and they were helped in December by a fall in gas price inflation from 25 per cent to 20 per cent, while electricity price inflation fell from 16 per cent to 14 per cent.

It is estimated that people over 75 allocate 9 per cent of their household spending to gas and electricity compared with 4 per cent allocated by people under the age of 30.

Older age groups also spend a greater proportion of their income on food and are therefore worst affected by food price inflation, which remained stable in December, at around 4 per cent.

Petrol price inflation fell from 13 per cent to 9 per cent in December, pushing down inflation for all age groups but particularly those aged between 50-65, the group allocating the largest proportion of their budget to petrol.

The rate of Consumer Prices Index (CPI) inflation fell to 4.2 per cent in December, from 4.8 per cent in November, according to the latest figures from the Office for National Statistics (ONS).

This is the third consecutive month that inflation has fallen and December’s figures represents the biggest monthly fall since April 2009.

Inflation is now at its lowest level since June last year and many economists are predicting a continued decline throughout the year.

In November, the Bank of England predicted that inflation would fall below the Government’s inflation target of 2 per cent by the end of this year.

Retailers’ attempts to generate sales by cutting prices in the run-up to Christmas have helped to push inflation down.

The price of clothing and footwear fell by 2.8 per cent between November and December and fuel prices fell by 1.1 pence a litre, although food prices increased by 1.4 per cent.

Although the fall in inflation will help to ease the strain on household incomes, analysts expect consumers to continue to control their spending in the face of continuing uncertainty over jobs and tightening credit conditions.

While there was good news on inflation today, a worrying economic forecast by the Ernst & Young Item Club suggests that the UK economy has fallen into a ‘technical’ recession due to the eurozone crisis and rising unemployment.

The Item Club has cut its GDP growth rate forecast from 1.5% to 0.2% for 2012 and expects unemployment to rise by a further 300,000 this year, to just below three million people

It does not expect the UK economy to recover until CPI inflation drops to 2 per cent late this year.

The Chartered Institute of Personnel and Development expects unemployment to remain above 2.5 million until at least 2016.

Britain’s economy stagnated in the final quarter of 2011 and is “very likely” to contract in the first half of 2012 according to the British Chambers of Commerce (BCC).

The euro zone debt crisis caused the economy to stagnate in 2011 and it has failed to improve this year, with the survey suggesting that one or two quarters of negative growth are possible.

A recession is usually defined as a decline in GDP for two or more consecutive quarters, a situation which the BCC believes can be avoided if the Government takes action.

The squeeze on household incomes from the Government’s austerity measures, high unemployment and rising prices have caused consumers to curb their spending.

In this environment retailers are struggling to boost sales and the housing market is floundering.

Although retailers such as Marks & Spencer managed to increase sales in the Christmas trading period, this was only achieved through heavy discounting, which still failed to boost the sales of higher-priced items such as household goods.

BCC director general John Longworth urged the Government to quickly implement the measures outlined by the Chancellor in the Autumn Statement.

He said: “Measures to improve the flow of credit to businesses, reforms of our complex planning system, and investment in infrastructure projects are all needed now”.

A recent poll by Ipsos MORI suggests that most business leaders believe the eurozone crisis will cause the UK economic climate to worsen this year.

The ‘captains of industry’ survey found that found that fewer than 10 per cent of 100 company bosses questioned expected the economy to improve.

However, 84% support the current Government and said that they expect its policies to improve the British economy in the long-term.

In its New Year report the CBI has called on UK businesses to increase their export activity to help the UK re-balance its economy.

The CBI believes that this could boost the UK’s economy by £20 billion over the next eight years.

The organisation is also calling on the private sector to invest £140 billion in the country’s infrastructure to help offset public sector cuts and to stabilise government debt.

The Government has already announced a number of projects in its National Infrastructure Plan including major improvements to the UK’s transport and broadband networks.

These re-balancing measures would help the UK reduce its dependence on debt-driven household and government spending, the CBI’s report suggests.

John Cridland, the CBI Director-General warned: “If we fail, the UK’s debts will continue to grow and our trend growth-rate will remain low. Only through rebalancing can we return growth to long-term sustainable levels.”

Mr Cridland warned that “2012 is going to be a hard road,” a view that is shared by UK businesses according to recent surveys.

According to new research by accountancy firm Deloitte, most companies are pessimistic about the coming year with more than 50 per cent of finance directors expected the UK to fall back into recession.

The monthly Lloyds Bank business barometer also suggests a fall in confidence among smaller companies in December, with around three quarters believing that another recession is likely.

The Financial Times today reported a similar fall in confidence among economists, with the results of a new poll suggesting that the UK economy could deteriorate to levels not seen since 2009, in the face of the continuing debt crisis in the eurozone.

However, only a small minority of the economists surveyed by the Financial Times believed that the Government should back-track on its austerity plan.

The Bank of England’s latest inflation attitudes survey suggests that fewer people believe inflation is being controlled effectively with interest rates.

In August, when the survey was last carried out, the proportion satisfied that the Bank was doing its job to set interest rates to control inflation, versus those dissatisfied, was 16 per cent, but this figure fell to just 9 per cent in the November survey.

The represents the lowest level of satisfaction since the survey started in November 1999.

Consumers who participated in the November survey said they expected prices to rise by 4.1 per cent over the next year.

They expect an inflation rate of 4.1 per cent over the same period, a slight fall from expectations of 4.2 per cent inflation recorded in the August survey.

Those surveyed said they expected inflation to be a median of 3.4 per cent in 2013, increasing slightly to 3.5 per cent in five years’ time.

The proportion of those surveyed who expect interest rates to fall over the next year fell to six per cent in the November survey, compared with 7 per cent in August, while 39 per cent said they expected interest rates to increase, compared with 38 per cent in August.

Although inflation fell to 4.8 per cent last month, the survey showed that people perceive it to be 5 per cent.

The results are based on a survey carried out by GfK NOP on behalf of the Bank of England, of 1,853 people in the UK aged 16 and over between November 3 and 8.

Meanwhile, in the eurozone inflation reached 3 per cent in November, the third consecutive month it has hit this level.

The eurozone economy is expected to have contracted by 0.6 per cent in the final three months of 2011.

The Consumer Prices Index (CPI) rate of inflation fell to 4.8 per cent in November it was revealed yesterday, representing the second consecutive 0.2 percentage point monthly decline.

Although the price of domestic heating and alcohol increased during the month, this was offset by a fall in the cost of food, petrol, clothing, furniture and household equipment.

A good harvest and competition between supermarkets helped to keep food prices down in November.

The Bank of England expects inflation to continue on a downward trend, reaching 1.5 per cent by the middle of next year.

It is then expected to remain below the Government’s 2 per cent inflation target until at least 2014.

Despite the fall, inflation is still outstripping wage rises and economic growth is expected to remain subdued, with the cost of goods and services rising twice as fast as household incomes.

According to figures released today by the Office for National Statistics (ONS) average earnings, excluding bonuses, were up 1.8 per cent annually in November.

Taking into account inflation, rising costs, ongoing cuts in public sector spending and a downturn in exports, analysts still expect the UK will fall back into recession next year.

There was also bad news on jobs today, with the number of people unemployed reaching 2.64 million in the three months to October, the highest level for 17 years.

Young people are fairing particularly badly in the jobs market, with 1.027 million people between the ages of 16 and 24 out of work.

This is the highest level of youth unemployment since records began in 1992.

However the overall unemployment rate remained steady at 8.3 per cent according to Office for National Statistics (ONS) figures.

With businesses worried over the ongoing eurozone debt crisis, a further rise in unemployment is expected over the winter.