Think-tank the National Institute of Economic and Social Research has forecast the UK economy will contract by 0.1 per cent this year.

This is due to flat economic output and poor net trade and could signal a return to recession during the first half of 2012.

Inflation is forecast to fall to 2.2 per cent, still above the two per cent target, but more manageable than the current figure of 4.2 per cent.

The report reads: “We forecast a return to a technical recession in the first half of the year, as households continue to retrench, credit conditions remain tight and businesses are reluctant to invest given uncertainty about both domestic and foreign demand.”

It expected growth to pick up by the second half but admitted that would be dependent on successful resolution of the Eurozone crisis.

In order to boost the UK economy, it suggested a temporary easing of fiscal policy but warned an increase in government investment would not have a significant impact.

“The UK economy currently suffers from deficient demand; the current stance of fiscal policy is contributing to this deficiency. A temporary easing of fiscal policy in the near term would boost the economy.

“The credible commitment to a sustainable fiscal policy over the longer term provides the Government with the flexibility to provide a clearly defined and temporary boost to near-term demand.

“An increase in government investment would not have a significant impact either on long-run sustainability or the likelihood of the Government meeting its fiscal targets.”